Stocks Dive as You Pay for Others’ Mistakes
Yesterday was not a good day to look at your retirement account; sometimes it’s better not to know. Those who did look discovered the Dow was down 565 at one point but struggled back to a mere 249-point loss by the end of day. It’s a headline that’s become all too familiar recently.
It’s not your imagination; the first days of 2016 really have been one of the worst starts to a year on record. With barely the first two weeks gone in this new year, stocks have already fallen back to where they were in 2014. According the numbers, stocks have a long way to fall before they’re considered “cheap” by historical standards.
As bad as the losses have been the Dow could have another 1,000 to 5,000 points to the downside. While everyone remembers the bloodbath of 2009, fewer remember the mini-crash of 2011, a down market that lasted for months. Investors took steep losses before indexes recovered in the go-go years of 2012 and 2013. But unlike 2011, the market situation today is in far worse shape in terms of systemic weakness.
CEOs Gone Wild
How we got here is a story as old as Wall Street. That story is corporate executives will always make sure they get theirs and most of them are compensated based on stock performance. Instead of actually growing the company, Mahogany Row figured out they could borrow cheap money from the government and use it to buy back their own stock. That way they could post growth numbers without any actual growth. That worked until stock valuations got so high they became unsustainable and a correction was inevitable.
Aggravated by China, the Fed
This correction, which was long overdue based on stock values, got some help to the downside from two widely different sources. The first was China, which hit its own economic growth wall. Chinese investors collectively realized stock valuations were insanely unsustainable and share prices collapsed. If you think we have it bad here, Chinese stocks were losing six and seven percent per day. Things got so bad Chinese regulators temporarily imposed trading stops in an attempt to limit the damage.
The market rout also got a kick from the Federal Reserve, which missed many opportune moments to raise interest rates, and finally decided to push rates higher at the absolute worst possible time. Already pinched by slowing overseas sales, declining profits and the strong dollar, the CEOs who were piling up debt to buy back stock and artificially inflate their companies suddenly saw borrowing costs spike. This was enough to sober up investors and the selling really started rolling downhill.
On top of the systemic weakness in stock prices, the oil market was another log on the fire. Collapsing oil prices rippled through global markets, destroying earnings and employment in the energy sector. In response to crashing oil prices, Saudi Arabia perversely decided to maintain production levels, making a bad problem even worse. Layoffs in the U.S. oil industry have gotten so bad Texas could experience negative job growth and North Dakota isn’t in much better shape.
All these factors add up to equity markets that are facing increasing volatility going forward. Even if stock prices recover, we’re likely entering an age where risk aversion produces faster and more unpredictable market collapses. In simple terms, the kind of death drops we’ve seen in the last few days could become the new normal. As volatility becomes (or perhaps has already become) normalized, investors will become increasingly defensive, potentially setting up a downward spiral that could last for decades.
The really frightening aspect to this market is what we’re seeing today could go on for years.
Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.