What You Need to know about the market this week

Since the beginning of 2016, it’s been nothing but bad news as stocks all around the world take big hits.

If you’re standing while you read this, please take note: this is the part where we tell you how messed up everything is. You might want to sit down for this…

What in the world is going on?

That’s the thought most likely to have gone through your mind as news of the most recent market panic filtered down to you.

It seems like every country is experiencing a significant correction; multiple Middle Eastern bourses have crashed, like Wile E. Coyote realizing he’s just run off a cliff, emerging market equities are sinking fast, China’s stock market is taking the stairs to the floor below, if you know what I mean, and Japan is officially in bear market territory.

A bear market occurs when an index loses 20% of its value as measured from some recent high. In this case, the Japanese Nikkei 225 is down 21% from its high in June 2015! That’s serious business. Imagine if you lost a fifth of your net worth in the span of three weeks. Panic.

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The U.S. isn’t safe either. While we’ve done sliiightly better than other countries, which is another way of saying we are the best of a bad bunch, almost two-thirds of the stocks in the S&P 500 have experienced bear-market declines. 90% of the stocks in the S&P 500 have experienced some sort of significant correction (10% or more decline). What started out as an infection in one part of the body is spreading. Fast.

Let’s not forget about oil prices. Oil prices have been coming down since mid-2014, taking the global energy industry along with it. In 2015, oil was the second-worst performing commodity – losing 30% in value. And in 2016, it seems to have picked up where it left off – reaching as low as $27 a barrel in January. One gallon of milk is now worth 2 gallons of oil. Seriously.

So where does that leave us?

The S&P 500 is back in the 1850’s, where it was mid-2014 and the Dow Jones is on track to record its worst month since February 2009. As we all know, that was in the midst of one of the worst recessions of all-time. Oh boy. Ohhh boy.

Why is this happening? WHHYYY?

If you believe the narrative that the mass media is pushing, then this is all happening because of China.

China’s economy is slowing down…and people are getting nervous. They’re selling off like crazy.

Maybe, but to believe that China is the beginning and end of this story is to ignore the true problem.

Investors are perhaps waking up to the underlying reality. The people who buy stuff are buying less stuff. And the people who sell stuff have too much stuff to sell.

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Take a good look at the Merchant Wholesalers’ Inventories to Sales Ratio above. It shows exactly what we’re talking about: the people who sell stuff aren’t selling their stuff. Put yourself in the shoes of a business owner. You get your merchandise from somewhere, and you pay for it. If it doesn’t sell that month, you keep it in your inventory (i.e.: a warehouse) and hopefully sell it next month. Hopefully. What the graph above shows is that inventories are rising even when you take sales into account. Nobody wants your stuff.

The state of global economic activity is just pretty poor to be honest.  Let’s look at the Baltic Dry Index for confirmation.

The Baltic Dry Index is regarded as a kind of early warning system for the state of global activity. It measures the cost of shipping dry commodities such as grain or livestock (but not oil because that’s definitely a wet commodity). When the Dry Index is low, that means the global economy is sick.

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Wow, that’s pretty damning, isn’t it?

We can see how the Baltic Dry Index and global trade move together and apart from a period of high activity in late 2010 and a brief spike in 2014 it looks like global trade has been depressed for YEARS.

So the evidence, brief as it may be, is definitely telling us something. We’ve never really recovered after the Great Recession in 2008.

This may be surprising news, the media’s spin doctors would have us believe that all was well and that the current sell-off is just a case of investor nerves; or rather the fault of a single country (China) in a world that is more economically interdependent than ever before.

As if.

But wait…

If economic activity has been so troubling for so long, why was the stock market doing relatively…well before now?

Firstly, 2015 was not a great year for the U.S. stock market – the S&P declined 9.55% last year.

Secondly, a lot of the stock market’s run up had to do with government meddling. Central banks were setting us up for this all along. By engaging in quantitative easing and buying up government bonds, central banks were encouraging investors to buy up equity. When central banks buy bonds, they lower bond yields, or the return on a bond. So if you’re a typical investor and you see that bonds are going to make you less money than before, you’re naturally going to reconsider putting your money into stocks.

So basically: the stock market run-up prior to 2015 was a bit divorced from both reality and the fundamental worth of the market under it. It’s like you’re at a flea market and the guy selling his stuff is doing a great job talking up his beaten-up old rug. While some people are falling for it…you know better. It’s just a tattered old rug with holes.

It’s a lot to consider, but best to take anything you hear about the markets with a pretty big pinch of salt right now. Expect to see more negative news to rear its head as the panic fully takes hold. It may get worse before it gets better.

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