September 23, 2021
Growing up, I remember my parents reading the morning newspaper when they had time, and they’d often watch the evening news. But nowadays, we get news all day long – on our phones, our laptops, smartwatches, TVs, and social media.
We are bombarded with news and media, whether we seek it out or not.
As investors, this overload can lead to too much market noise, which is when hype, inaccurate data, or small price corrections and fluctuations in the market distort our picture of the overall trends.
Market noise can lead to knee-jerk selling that comes from haste and emotion rather than carefully analyzed data.
This week began with stocks in the red, and the S&P 500 Index posted its worst day since May.
Investors seemed to run for the hills amid concerns about the recent China investing crisis and other news (more on that in a bit).
But are they simply overreacting to the headlines? Are these risks real?
The most critical part of investing is keeping a clear head… And earlier this week, it was evident that few investors are capable of such a feat.
The markets tend to overreact… It’s like one person gets an idea and they all follow. And this herd mentality can punish free-thinking, independent investors in the short term.
But ultimately, it’s the leaders – not the followers – who make the biggest gains in the stock market.
Investors worried about the markets falling off an infinitely steep cliff are not thinking clearly. Their concerns about the market aren’t sustainable or valid.
Today, let’s look at some of the big market concerns right now, and why they shouldn’t be a huge cause for investing concern.
Investor Concern No. 1: The Fed
The Federal Reserve held a highly anticipated meeting this week, with folks speculating the central bank could pull away from its monetary stimulus.
But does anyone really believe Jerome Powell is going to totally pull the rug out from under this country? Have we not seen what the Fed is capable of since 2008? Do you not know who is currently running the Treasury Department and what impact she has on the Fed’s thinking?
Let’s be realists here… There’s no way the Fed is going to exit too fast.
If anything, we run the risk that the Fed will keep the liquidity spigot open too long and create mass inflation in the process. But I’m certainly not delusional enough to think the Fed is about to exit stage left.
Even the Fed’s tapering plans will most likely also be delayed…
Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, agrees, saying:
The recent stock market turmoil, looming fiscal cliff and surprisingly weak August jobs report will give Federal Reserve Chair Jerome Powell convenient excuses to reiterate his intent to taper, but allow him to fall short of actually committing to a November start to tapering.
Investor Concern No. 2: China’s Evergrande
The other big issue du jour is the fear of a “Lehman-like moment” in China. One of China’s largest lenders, real-estate developer China Evergrande, is facing billions of debt with the threat of default. Evergrande has about $300 billion in outstanding debt it can’t pay, which means equity holders in the company could get wiped out – and creditors could be left with pennies on the dollar.
But comparing the current situation to Lehman Brothers in the 2008 financial crisis is an awfully big suggestion… By allowing Lehman to fall as it did, the entire financial system nearly collapsed. That was because everyone and their cousin seemed to be holding the hot-potato subprime loans in their portfolios (and many didn’t even know it).
But that was then… and today’s environment is very different. Financial contagion – at least as it pertains to Evergrande having a massive effect on the U.S. or Europe – is overdone… We’ve all seen that Lehman movie before… And the Europeans caught the sequel with the European debt crisis. We won’t let that happen again.
As a result of 2008, the U.S. and Europe now have a series of stress tests in place for financial institutions to ensure we’re not investing in risky assets that we shouldn’t… that debt instruments haven’t been “over securitized” (i.e. – packaged and repackaged). So I’d be awfully surprised if U.S. institutions were holding debt in Evergrande.
So, while the bankruptcy of Evergrande could be troublesome for the Chinese economy in the near term – which yes, might have some effect on U.S. earnings of multinational companies doing business with China – the impact should be quite muted and primarily an issue just for Asia, not the U.S.
After months of extraordinary gains, the U.S. stock market is now looking off. Investors worldwide now ask, “Is this the beginning of the end of the most epic stock rally in history?” All eyes are on September 28 for the answers. Here’s the entire story.
Investor Concern No. 3: Washington, D.C.
Another issue causing worry among some investors: Washington. Now, smart folks shouldn’t be stressing this one, because if you don’t know by now that politicians will always be politicians… then I’ve got some oceanfront property in Arkansas to sell you.
At present, our federal government is facing a looming debt ceiling that must be lifted sometime in the next seven days, or as Fortune‘s headline said, “The U.S. government could both shut down and default on its debt within the next month.”
Meanwhile, The Washington Post is blaming the Republicans for the trouble… And the GOP is blaming the Dems. You can see how this works.
At issue is the money it takes to fund the government every week to effectively “keep the lights on.” The government needs cash, and Congress has until the end of the month to ratify a new spending agreement. If it fails to do so, the government will be shut down (non-essential services at least).
Now, I’m quite confident the U.S. could handle a shutdown for a few weeks, or even a few months. We saw proof of that during the coronavirus lockdowns. At that time, government workers were paid the entire time – even without needing to go to work.
If the government shuts down, federal workers will need to wait until it reopens to collect their checks. But they’ll still get paid. Social security payments, meanwhile, would be temporarily suspended. Of course, none of this is good… But fortunately, Americans’ saving levels have risen significantly. That said, Democrats and Republicans alike should be working together to avoid a shutdown.
Republicans are refusing to lift the debt ceiling because they say the Democrats are packing immigration issues into the mix. Dems, for example, want $6.4 billion resettlement money for Afghanistan refugees included in the measure – and that’s not really flying well with conservatives who are still reeling from the poorly planned withdrawal from the terrorist-run nation.
The reality is this… The debt ceiling has become a bit of a joke. Since 1960, the U.S. government has lifted the debt ceiling an estimated 80 times, as Treasury Secretary Janet Yellen reminded us earlier this week. Yellen’s op-ed in The Wall Street Journal pointed out what we all already know… that it would be an “economic catastrophe” for the U.S. to default on debt.
She’s not wrong… Let’s be clear: If the U.S. defaulted on its debt – something we’ve never done in an entire history as a nation – then, President Biden would most assuredly go down in history as the worst president ever!
I realize there are those who would like Biden to fail. But politics should never be the motivation for such a debacle. It would be bad for America, and no matter how much you may dislike a politician and want to see them fall on their face, failure would be bad for all of us.
Meanwhile, there are others who believe we should be willing to walk away from our creditors… those that say, “But who cares? We can restructure the debt, etc.” But call me old-fashioned – I believe a nation should pay its bills.
Let’s hope that Biden, despite his incredibly poorly planned moves in Afghanistan and now mistakes at the U.S.-Texas border, at least knows enough to pay the bills.
I know the Biden team has made some blunders… including alienating France (France!) so much that the country just pulled its ambassador, but stiffing our creditors? That’s really not American.
And it’s not going to happen… The Dems control the House, the Senate, and the White House. Given their position of power, they shouldn’t be relying on Republicans… And they certainly shouldn’t be defaulting on our debt.
One of the reasons we made it through the COVID-19 crisis so well was because the rest of the world wanted to invest in the U.S. America is still seen as the safest place to park your money. And while I know AOC and others would just like to tax it all, the reality is that in the here and now, the U.S. is still the safest investing bet in town.
It’s easy to get caught up in headlines and point out our flaws. It’s easy to roll your eyes and say the government is messed up (sure, it is) and our long-term fundamentals are working against us.
But the reality is, putting your money under the mattress isn’t going to work… If you simply sit on cash, you’ll have a lot less of it in 10 years given the rate of inflation.
So, smart investors really have no choice but to invest… When the market goes lower, assuming you don’t need the money in the near future – the next one to four years – then why not do some bargain hunting and seek out some value investing opportunities? The idea is to not move with the masses but to buck the trend.
Most importantly, investors need to remember to keep a clear head. Be an independent thinker. Know what’s real… and what’s not. And at all times, folks should avoid the political hyperbole and those who are simply talking their books.
Love us? Hate us? Let us know at [email protected].
Publisher, American Consequences
With Editorial Staff
September 23, 2021