The financial markets are in chaos…
Chinese stocks crashed again last night, dropping 7% in less than an hour. The Shanghai Composite Index is now down 11.7% this week, and 40% since peaking last June.
For the second time this week, China’s stock exchange completely shut down. As Dispatch readers know, China put new “circuit breaker” rules in place that shut down the exchange if stocks drop too quickly. Last night, the exchange was only open for 29 minutes before a flood of selling shut it down.
The plunge in Chinese stocks set the tone for a horrible day in global markets. The S&P 500 plunged 2.4% today, and is now down 5% on the year. The Euro Stoxx 600, which tracks 600 of Europe’s biggest stocks, is down 6.4% this year. The Japanese Nikkei 225 is down 6.7%.
In the first three trading days of 2016, global stocks have lost $2.5 trillion in value.
• Commodity prices are also plunging…
Yesterday, oil plummeted 6%. Today, it fell another 2.3% to its lowest level since February 2004. Oil is now down 69% since June 2014.
Coffee dropped 6.8% today…lumber dropped 3.9%…and copper dropped 3.2%.
• George Soros believes this is the beginning of a major crisis…
Soros is one of the greatest traders of all time. From 1969 to 2011, he generated an average annual return of 20%…nearly double the S&P’s average return of 11%. He’s famous for making $1 billion on a single trade that “broke” the Bank of England in 1992.
At a conference today, Soros warned:
I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.
The S&P 500 plunged 57% during the 2008 financial crisis.
• If you’ve been reading the Dispatch lately, you know we agree with Soros…
We’ve been warning for months that stocks are at risk of a big drop. The bull market in U.S. stocks is nearly 83 months old, or 33 months longer than the average bull market since World War II.
And since March 2009, the S&P 500 has gained 191%, far higher than the average gain of 136% of U.S. bull markets going back to 1932.
U.S. stocks are also expensive. According to the popular CAPE ratio, stocks in the S&P 500 are 48% more expensive than their historic average.
Old age and high valuations don’t guarantee that stocks will fall. But all bull markets turn into bear markets eventually. And when stocks are expensive, they have more room to fall when the market turns down. It’s like the old saying, “the bigger they are, the harder they fall.”
Even an average bear market would be extremely painful. As financial website The Reformed Broker reported yesterday, the average cyclical bull market over the last century has ended with a 37% drop in the Dow Jones Industrial Average.
We think there’s much more downside than upside in U.S. stocks today. We suggest avoiding expensive stocks and companies that will struggle to make money during an economic downturn.
• E.B. Tucker, Editor of The Casey Report, called the end of the bull market in early September…
The issue was titled “R.I.P. 2009 – 2015 Bull Market.”
E.B’s call has been dead-on. The S&P has lost 1% since September, as you can see in this chart.
• Gold spiked to a two-month high today…
Gold jumped 1.3% today to its highest level since November. It’s now up 6% on the year. Silver also spiked 2.7%, to $14.35/oz.
Investors typically buy gold (and silver) when they sense financial danger. That’s because gold has preserved wealth through economic depressions, stock market crashes, and every other kind of crisis. It’s the ultimate form of wealth insurance.
• We recommend owning a significant amount of physical gold today…
Instead of putting a large amount of your wealth in stocks, own a significant allocation of physical gold.
We also suggest stockpiling cash. Stockpiling cash will give you “ammo” for the next opportunity to buy stocks at bargain prices.
As Dispatch readers know, we’ve been preparing for a bear market for months. You can learn our favorite strategies for protecting and growing your money during a bear market by watching this free video.
Chart of the Day
Gold is doing its job…
Today’s chart shows the performance of gold versus the S&P 500 this year. Although the year just started, gold is doing its part as a “safe haven” asset while global stock markets sell off.
If you agree with us that stocks are at risk of a big drop, owning gold is the number one way to protect your money.
This article by Justin Spittler first appeared on CaseyResearch.com on 7 January 2015.