In this case, a China slowdown has been the target of a market fallout for eight years. Stocks have gone up. An implosion of the European Monetary Union has been predicted since 2011. Stocks have gone up. Currency and trade wars have been underway throughout the post-Great Recession environment. Stocks have gone up. A “hard Brexit” has been going to crush markets and the global economy since 2016. Stocks have gone up. A huge spike in inflation and interest rates has been guaranteed to be the punishment, for the decade of “irresponsible” money printing. Stocks have gone up.
And with these things to obsess about, people have been steadily convincing themselves that a recession was coming (the opposite of what the data tells us) and that earnings were deteriorating or “peaking” (peaking earnings growth at 20% y-o-y is very different than peak earnings). The recession and exhausting economic momentum stories are non-sense.
Short of a major economic blow-up, things are as good as they’ve been in more than a decade and getting better. And for people that think another Lehman like moment could be coming (Europe, China, Brexit…), remember, part of the Lehman moment/global credit freeze, was driven by uncertainty about how governments and central banks would respond. But we now know, very clearly, how they will respond to shocks. There is no uncertainty. They will do whatever it takes to maintain stability (re-write rules, whatever it takes), as they have over the past decade (post-Lehman) to avert further systemic shocks.
Still, all of the “what could go wrong” scenarios are what exacerbates the fear, after a decline in stocks gets started. And in this case, as we’ve discussed, it looks very clear that both this decline, and the correction earlier this year, were triggered by Saudi liquidations (for fear of asset seizures). And now we have panic-driven selling by uninformed investors.
Remember, most average investors are NOT leveraged. And with that, they should have no concern about U.S. stock market declines, other than to ask themselves, “do I have cash I can put to work at cheaper prices?”
So with that, let’s take a look at the chart and see where this shake out might stop? I think we’re close.