Heading into last week, I said the global market was suffering from schizophrenia – unable to resolve the disconnect between a relatively strong U.S. stock market and a slew of volatile global risk factors.
Now it seems global markets are having a full blown psychotic break.
Over the weekend, Greece voted “no” to the latest bailout proposal, leaving the country’s future in limbo. Now everyone is speculating on the odds that Greece will leave the euro. The country has already defaulted on its debt to the IMF, and it now faces a $3.9 billion payment to the European Central Bank on July 20. If it fails to pay – and it can’t without a deal in place – it’s game over for the Greek banking system. The only thing keeping them afloat right now is a steady stream of ECB emergency funds.
The country’s finance minister has resigned in an effort to wipe the slate clean and start over with fresh negotiations with Greece’s creditors. But it’s hard to see Germany suddenly having a change of heart here, and with every passing hour Greece’s banks get bled a little drier as Greek savers take out whatever funds they can and stuff them under the mattresses.
At this point though, everything’s still up in the air in Greece. This is good. This drama needs to reach a climactic end so that global markets can get over it and move on. The closer we get to some ending, in my eyes, the better.
U.S. markets are in a holding pattern until Greece finds a way forward. So until that happens, we just have to sit tight.
Meanwhile, China’s equity market is still in crisis. Stocks are now down 29% from their mid-June highs, prompting regulators to assemble a market-stabilization team – a group of Chinese brokers who’ve pledged to buy upwards of $20 billion worth of Chinese stocks to stem the bleeding.
Clearly, China is desperate!
The country’s state-run media is of course trying its best to soothe investors’ fears, saying: “Rainbows always appear after rains.” But this train-wreck market crash is far from over.
The good news is this: our Boom & Bust portfolio is fully prepared for the market turmoil that’s being unleashed. Over time, we’ve incorporated smart hedge plays that are designed to kick in an added layer of protection in times like this. That’s the beauty of our approach – it’s designed ahead of time to weather turbulent markets, such as these we’re experiencing now.
Let’s take a closer look at this craziness …
- On Friday, Global stock markets closed sharply lower for a second week. European shares (VGK) suffered the steepest drop, at 4.8%, while Chinese shares (FXI) lost 3.7% and the S&P 500 (SPY) lost 1.2%.Like the week prior, investors’ risk-aversion is palpable and it’s leading them to the relative safety of U.S. stocks, which appear to be the only equity market in which one can hide while the turmoil in Greece and China comes to a head. I recommend staying invested in our “All About the U.S.” trades – which include a long position in the S&P 500 (SPY) and short positions in Chinese (FXI) and emerging-market (EEM) ETFs (one or both).
- Bond markets closed lower, with the exception of U.S. Treasurys (IEF), which eked out a 0.1% gain. Junk bonds (JNK) were the worst-performing of the group, down 0.9% – a clear sign that investors aren’t interested in risky assets and instead prefer the safe haven of U.S. Treasury bonds. Expect that trend to continue as long as the turmoil in Greece and China is in the news.
- Commodity markets were also weak, as heavy selling resumed in energy markets. Natural gas (UNG) closed down 1.2% and crude oil (USO) lost 5.3%. I’ve long warned that the energy sell-off was not over and that long positions in related sectors are ill-advised. Now that investors are increasingly skittish about the state of global markets, the energy sector’s faux recovery is beginning to fall apart. I continue to recommend staying on the sidelines as energy prices head lower.
Last week I said: This week is likely to be messy, as the turmoil in Greece is still unresolved, yet coming to a head. It’s rarely wise to make knee-jerk reactions amidst chaos and uncertainty.
Well, last week didn’t disappoint! And I fully expect the turmoil to continue this week as well.
I’ve always said that it’s best to sit tight during times of market turmoil. And that’s exactly what we need to do this week.
Chief Investment Strategist, Dent Research