Volatility has come storming back…

For the past couple months, the stock market has been eerily quiet. Now, this wasn't completely unexpected. After all, many traders on Wall Street take off all of August.

But this summer was abnormally calm.

The S&P 500 went 40 days without a 1% move. That was its longest stretch without a big move in decades.

When the market is this quiet, many investors let their guards down. They buy stocks they know are risky. They stop checking their portfolios. They forget to set “stop losses,” which will automatically sell a stock if it starts to tank.

We urged readers to not make these careless mistakes. As we explained on August 25, “periods of extreme calmness have preceded some of history’s biggest selloffs.”

We got a taste of that last week…

• On Friday, U.S. stocks plunged…

The S&P 500 plummeted 2.5%. The Dow fell 2.1%. And the Nasdaq fell 2.5%.

Bonds also tanked on Friday. The yield on the 10-year Treasury jumped from 1.6% to 1.7%. Bond yields rise when bond prices fall.

Yesterday, stocks plummeted again. The S&P 500 ended the day down 1.5%. The Dow and Nasdaq fell 1.4% and 1.1%, respectively.

Today, we’ll tell you what sparked the recent selloff. As you’ll see, the stock market has serious problems that are here to stay. We’ll also show you how to protect yourself for when stocks plunge again.

• Investors are worried what the Federal Reserve’s next move will be…

As you probably know, the Fed launched an unprecedented stimulus program after the financial crisis.

It’s held its key interest rate near zero since 2008. It’s also pumped $3.5 trillion into the financial system.

These radical measures were supposed to stimulate the economy.

They didn’t work. The U.S. economy has grown just 2.1% per year since 2009. That’s less than half the country’s historical growth rate.

While the Fed failed to fix the “real” economy, it did blow a huge bubble in stocks.

The S&P 500 has gained 214% since March 2009. Last month, it set a new all-time high.

• The stock market is now hooked on easy money…

But there’s a problem. Many investors think the Fed could raise rates soon, and that scares many investors. The Wall Street Journal reported yesterday:

Expectations that interest rates would remain lower for longer have helped fuel a rally in a broad range of financial assets in recent months, from U.S. stocks to emerging-market bonds.

Speculation that the Fed could raise rates as soon as next week contributed to a sharp selloff in stocks and government bonds on Friday.

• After Friday’s selloff, the Fed tried to calm investors…

On Monday, three Fed officials said they were in no hurry to hike rates. One official said the Fed needs to have a “serious discussion” about the economy before it lifts rates.

The Fed’s dovish tone was exactly what investors wanted to hear. Reuters reported yesterday:

U.S. stocks led global shares higher on Monday after Federal Reserve policymakers sounded cautious notes on near-term interest rate increases, while the U.S. currency slipped.

To be clear, the Fed was never planning a big rate hike. If the Fed does hike rates, it will only lift its key rate by 0.25%. This would take the Fed’s key rate from about 0.40% to 0.65%. Keep in mind, the Fed’s key rate has averaged 5.0% since 1954.

In other words, it would still be incredibly cheap to borrow money even if the Fed raises rates.

Still, the mere thought of a rate hike terrifies investors. This tells us something is very wrong with the economy.

Of course, that’s not the only reason to be worried about this market…

• Yesterday, the International Energy Agency (IEA) said oil demand is softening…

MarketWatch reported yesterday:

The agency downgraded its global oil demand predictions by about 100,000 barrels a day for this year to growth of 1.3 million barrels a day, and cut its forecast for 2017 by 200,000 barrels to growth of 1.2 million barrels a day.

The IEA cut its outlook due to a “more pronounced slowdown” during the third quarter. MarketWatch explains:

Matt Parry, IEA senior oil economist, told MarketWatch that the key takeaway from the report is that global oil demand growth is “slowing very sharply.”

Based on the forecasts, “both Chinese and European oil demand growth have all but vanished by 3Q16,” said Parry.

• The price of oil plunged 3% on the news…

Oil stocks crashed too. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which holds major U.S. oil producers, fell 4.3%.

The IEA’s warning also hit stocks outside the oil industry. The S&P 500 fell 1.5%. All 10 sectors in the S&P 500 ended the day in the red.

This isn’t surprising. You see, oil is the world’s most important commodity. It powers our cars, trucks, and airplanes.

If the economy is using less oil, it’s because people are driving less, shipping fewer goods, and taking fewer vacations.

• If we get more bad news about the economy, the Fed may have no choice but to keep rates low…

This could keep stocks afloat. It could even lift them.

Still, we aren’t rushing back into stocks.

Right now, the global economy is tiring. Corporate earnings are weak. And stocks are more expensive than they’ve been in years. In other words, easy money is about the only thing keeping stocks from crashing.

If you do still own stocks, here’s what you can expect:

More volatility. The VIX, which measures how much volatility traders expect over the next 30 days, has soared 45% since Thursday. It’s trading at the highest level since the “Brexit.”

Low returns. Earnings for companies in the S&P 500 have fallen five straight quarters. That’s the longest earnings drought since the 2008–2009 financial crisis. Historically, earnings have been the stock market’s main driver.

• We see far more danger than opportunity in the stock market right now…

Here are two easy ways you can protect your wealth today:

  1. Hold more cash than usual. Setting aside cash will help you avoid losses if stocks plunge. You’ll also be in a position to buy elite businesses when they get cheap again.

  2. Own physical gold. Unlike paper currencies, gold has survived every financial crisis in history. It’s the ultimate safe haven asset. Gold’s value should skyrocket the next time stocks crash.

These are simple yet proven ways to protect your wealth from a stock crash. But there’s certainly much more you can do.

E.B. Tucker, editor of The Casey Report, has “crash proofed” his portfolio. He’s only investing in companies that can make money during a long economic downturn. He’s shorting (betting against) some of America’s weakest companies. And he owns gold stocks. These companies are leveraged to the price of gold. They could soar two, three, or even five times higher than the price of gold during a stock market crash.

So far, E.B.’s approach has paid off. The Casey Report portfolio is up 15% this year. It’s beat the S&P 500 nearly 4-to-1.

E.B. expects to make even bigger returns going forward. Like Casey Research founder Doug Casey, E.B. thinks a major financial crisis is about to slam into the global economy.

According to E.B., this crisis is already well underway. To see why, watch this FREE eye-opening video.

Chart of the Day

September is the worst month of the year to own stocks.

Today’s chart shows the average return for each month of the year. The chart, which originally appeared in this month’s issue of The Casey Report, uses data from 1802 to 2006.

As you can see, September is by far the worst month to own stocks. It’s the only month that had a negative average return between 1802 and 2006.

This might surprise some readers. After all, the Panic of 1907, the Great Crash of 1929, and Black Monday in 1987 all happened in October. Still, you can’t argue with 200 years’ worth of market data.

Using this information, E.B. told readers last Thursday to “think twice before buying stocks.” His advice was spot-on, as stocks plunged 2.5% the very next day.

Regards,

Justin Spittler
Delray Beach, Florida
September 14, 2016

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