Global stocks had an awful day today.
The S&P 500 ended the day down 1.5%. The NASDAQ fell 2.1%.
Foreign stocks dropped, too. The STOXX Europe 600, which tracks 600 of Europe's largest stocks, dropped 2.5%. The Japanese Nikkei 225 fell 3.1%.
A huge drop in Chinese stocks ignited this global selloff…
• The Shanghai Composite Index plunged 6.9% on Monday…
It was the worst day for Chinese stocks since late August. Regular readers will recall that Chinese stocks had one of their worst crashes in history this past summer.
Monday’s plunge tripped China’s new “circuit breaker” rules, which caused the Chinese exchange to shut down for the rest of the day. The Chinese government put these rules in place to prevent panic selling if stocks fall too much in one day.
Like most government rules, China’s circuit breaker rules make things worse instead of better. They encourage more panicked selling as investors try to get out before the exchange shuts down. Bloomberg reports:
Individual investors in China, who drive more than 80 percent of trading, may have rushed to sell after the first circuit breaker took effect to avoid getting stuck in positions by the 7 percent suspension, according to Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong.
• Chinese stocks tanked on bad economic data…
The Caixin Purchasing Managers’ Index, which measures Chinese factory activity, fell from 48.6 in November to 48.2 in December. A reading below 50 means the Chinese manufacturing sector is shrinking. The Caixin index has been below 50 for ten straight months.
It was the latest in a long string of ugly economic data for China. Last year, China’s economy grew at its slowest pace since 1990. In October, China’s services sector grew at its slowest rate since 2008.
• China’s slowdown is slamming commodity prices…
China is the world’s second-largest economy and the largest consumer of commodities. It uses half of the world’s aluminum, nickel, copper, steel, and coal.
The Bloomberg Commodity Index, which tracks 22 different commodities, declined 25% in 2015. Many individual commodities did even worse.
The price of oil fell 31% last year. Coffee fell 28%. Copper fell 26%.
• Commodity prices fell along with Chinese stocks on Monday…
Copper dropped as much as 2.9% on Monday. Nickel and sugar both dropped as much as 2.6%.
Shares of the world’s largest miners also plunged…
Anglo American (AAL.L), the world’s fifth-largest mining company, plunged 7.4% on Monday. Glencore (GLEN.L), the world’s third-biggest miner, fell 5.7%. Both stocks are near all-time lows.
BHP Billiton plc (BLT.L), the world’s largest publicly traded mining company, fell 3.3% to its lowest level since the 2008 financial crisis.
The collapse of the global mining industry is a troubling sign for the global economy. These giant miners sell the “building blocks” of the global economy. Right now, they’re suffering because there’s very little demand for raw materials.
• The U.S. stock market still looks OK on the outside…
But as we’ve warned, it’s rotting away beneath the surface.
When most investors talk about “the stock market,” they’re talking about the S&P 500, an index of five hundred of the largest publicly traded U.S. stocks. The S&P 500 fell 0.7% in 2015 for its first losing year since 2008.
The S&P 500 is weighted by company size, which means bigger companies affect its performance far more than smaller companies. Apple (AAPL), the largest publicly traded company in the world, makes up 3.7% of the index. Target (TGT), the 102nd-biggest company in the S&P 500, makes up just 0.25% of the index.
• A handful of giant stocks are propping up the market…
For example, Google (GOOG), the second-largest company in the S&P 500, rallied 44% in 2015.
On Sunday, Financial Times explained how strong performances by Google and a few other huge companies are hiding problems in the U.S. stock market.
Had it not been for a small group of nifty companies, 2015 would have entered the history books as a terrible year for the U.S. stock market.
Yet there were some very high numbers for a group of four companies that have come to be known as the “Fangs” — Facebook, Amazon, Netflix, and Google — and for a slightly wider group that added Microsoft, Salesforce, eBay, Starbucks, and Priceline to create the “Nifty Nine”. Both groups gained more than 60 per cent for the year.
Financial Times continued:
Dominance by a few big companies – or a “narrowing” market – is a symptom of the end of a bull run, as it was in the early 1970s (dominated by the “Nifty Fifty”) or the late 1990s (dominated by the dot-coms).
• The stocks propping up the market are extremely expensive…
Take the “FANG” stocks, for example…a nickname the financial media gave to four red-hot stocks that have been propping up the U.S. stock market.
Google has a price to earnings, or PE, ratio of 37. Facebook (FB) has a PE ratio of 105. The PE ratio for Netflix (NFLX) is 305. And Amazon (AMZN) has an astronomical PE ratio of 980. The higher a PE ratio, the more expensive the stock.
• Most U.S. stocks are expensive right now…
The PE ratio for the average stock in the S&P 500 is 30, nearly double the S&P 500’s average PE ratio since 1917.
And here’s another reason to be cautious about U.S. stocks…
The current bull market is nearly 82 months old, 32 months longer than the average bull market since World War II.
Since 1932, the average gain for U.S. bull markets is 136%. Since March 2009, the S&P 500 has gained 195%.
All bull markets end eventually. And when stocks are expensive like they are now, they have more room to fall when a bear market takes hold. It’s like the saying, “what goes up, must come down.”
• There’s more risk than opportunity in U.S. stocks right now…
Instead of putting a large amount of your wealth in stocks, we recommend holding large allocations of cash and physical gold right now.
A large cash reserve will ensure that you can buy stocks the next time they’re cheap. And physical gold is the ultimate form of financial insurance. It’s preserved wealth for thousands of years and through every kind of financial catastrophe. Today, the price of gold jumped 1.2%…while most other commodities and stocks dropped.
If you’re interested in other ways to protect your money in a bear market, watch this free video. It explains specific strategies that Casey Research founder Doug Casey is personally using to prepare for the financial storm he sees coming. Click here to watch.
Chart of the Day
U.S. stocks continue to outperform foreign stocks…
The S&P 500 was basically flat in 2015. Meanwhile, the MSCI World ex-USA Index, which tracks the performance of 22 foreign stock markets, fell 5.4%.
Today’s chart shows the performance of the S&P 500 relative to the MSCI since 1998. A rising line means U.S. stocks are outperforming foreign stocks.
This ratio has averaged 0.87 since 1998. Today the ratio is at an all-time high of 1.21. As you can see, U.S. stocks have been outperforming foreign stocks since the 2008 financial crisis.
Investors looking for cheap stocks should look outside the U.S.
Delray Beach, Florida
January 04, 2016
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