Thirteen years ago, on September 15, 2008, Lehman Brothers, one of the largest banks in the U.S., collapsed. The reality is the bank was overleveraged in the real estate market during the housing boom, as it invested in risky real estate and subprime mortgages. When the housing bubble burst, Lehman Brothers didn’t have the cash to cover its loans. As a result, the big bank went bankrupt.
While the “Great Recession” was already underway, it was Lehman Brothers’ mighty fall that was the straw that broke the stock market’s back. Stocks initially chopped around on hopes that the Senate would bail out the big bank, but when they decided not to, stocks were sent into a tailspin. On September 29, 2008, the Dow plummeted 777 points and the S&P plunged 8.8%. At the time, this was both indices’ biggest one-day selloffs in history.
So, when it was announced yesterday that Chinese real estate company Evergrande was on the verge of defaulting on its nearly $300 billion in debt, Wall Street felt a little déjà vu. As a result, investors knee-jerk reacted, causing the Dow to fall as much as 970 points and the S&P 500 to slip 2.9% during intraday trading.
Suffice it to say, it was a bad day for the market, though I must admit I did find it ironic that the financial markets in China and Taiwan were closed while the U.S. markets sold off.
The reality is that China has a debt bubble that’s being pricked. A few weeks ago, its junk bond market was showing some cracks. But is Evergrande China’s Lehman Brothers? And, more importantly, is now the time to sell and sit on the sidelines?
Personally, I don’t think so.
The fact of the matter is Evergrande is too big to fail — and I’m not alone in this thinking. My favorite economist Ed Yardeni commented yesterday morning that the Chinese government is likely to intervene in order to protect the Chinese economy and global markets from the fallout. He noted that Evergrande management is likely to be replaced, and the company will probably be restructured.
Yardeni compared the current Evergrande situation to what occurred in 1998 with Long-Term Capital Management. At that time, the Federal Reserve and other major financial institutions stepped up to protect the U.S. economy — and global economy — from a major collapse when the hedge fund’s leveraged trading strategies failed.
This is why I believe yesterday’s sharp pullback is a prime example of Wall Street’s tendency to “act first” and “think later.” Yes, the Dow’s nearly 1,000-point plunge was gut-wrenching, but I suspect clearer heads will prevail and the stock market will firm up in the upcoming days.
Remember, we have the Federal Open Market Committee (FOMC) statement on Wednesday (I’ll share my thoughts on the FOMC statement in Thursday’s Market360 article, so stay tuned for that!), and I expect the Fed to remain dovish, which should trigger a nice relief rally.
The reality is the Fed has to remain accommodative. As I explained to my Growth Investor subscribers last Friday, in 2020 only 39% of Americans paid income taxes. So, even if the federal government taxes all of us at 100%, the federal budget deficit will still be more than $8 trillion. The federal government has essentially reached the point of no return, and it is following the same path as Japan and Europe. It simply cannot tax its way out of the deficit conundrum. I should also add that the Social Security Trust Fund ran a deficit in 2020 and will be out of money in 2034.
Given the massive federal budget deficit, I don’t expect the Fed to raise key short-term interest rates much higher. We may see the Fed raise the Fed Funds Rate from 0.25% to 0.5% in late 2023 and then to 0.75% in 2024. But rates aren’t likely to go much higher than that. Due to the dire U.S. fiscal situation, the Fed has no choice other than to print money and keep interest rates artificially low.
As a result, the U.S. stock market should remain an oasis in the ultralow interest rate environment. The S&P 500 and Dow continue to yield more than Treasuries and the banks, which is driving yield-hungry investors back to the stock market to high-quality stocks. This is especially great news for my fundamentally superior Growth Investor stocks. During the second-quarter earnings season, my average Growth Investor stock posted a 26.9% second-quarter earnings surprise, and many rallied on their strong results.
Considering this, I am looking forward to the third-quarter earnings season and what it has in store for my Growth Investor stocks. I should add that my Growth Investor stocks are characterized by 46.9% annual sales growth and 57.2% annual earnings growth, and I fully expect them to post wave-after-wave of positive earnings results, which, in turn, should dropkick and drive them higher.
P.S. John F. Kennedy once famously implored us to “ask not what your country can do for you; ask what you can do for your country.”
Now a new generation has turned that statement on its head.
We’ve reached a point of no return.
Our country has been taken over by a gang of folks who would rather take money from us than earn it themselves.
We have become what our forefathers feared:
A nation of takers.
If you’re a believer in financial responsibility and the ideals of the Founding Fathers like George Washington, this should scare you.
If you have any money in savings, in the stock market, in a 401(k) or even cash stuffed under the mattress, this should make the hair on your neck stand up.
I recently recorded a video to explain exactly what’s happening… and why it’s so dangerous to your wealth.
And I’ll share what I’m doing with my money to protect myself. (Hint: It has nothing to do with gold, precious metals or cryptos.)
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.