It was bound to happen sooner or later.
The question is: whether today’s 700 point sell off is part of something much larger.
It depends on your time horizon, of course. I tend to think not…because, even in the face of disaster, the U.S. is still the safest place to be. (Story continues below.)
Will We Face Another Round of Lockdowns?
At present, the question on investors’ minds is whether the world will confront another round of lockdowns. Clearly, it’s a possibility.
Consider how readily our politicians in blue states locked the economy down early on. Consider the moves countries like France is taking to ensure no-one mingle in public without proof of vaccination.
It’s quite possible that as the Delta coronavirus variant spreads, increasingly, there will be more lockdowns. As such travel companies will be punished, oil prices and airlines could be under pressure in the coming weeks. (And indeed, that sentiment is reflected in markets today with airlines among the worst performers.)
How LOW Can the 10-Year Yield Go?
Investors are moving into treasuries – again, in a safe-haven style play. The yield on the 10-year treasury bond fell to 1.19% from 1.3% on Friday. It may go even lower, should the world face more lockdowns.
Long Term Investors Need To Stay Focused
The moves in the markets are similar to the patterns we witnessed in March 2020. On the plus side, investors have seen this movie before. As such, the smart money will be looking for opportunities in oversold sectors and companies.
Inflation will ultimately prove to be a serious problem for this economy. The consumer price index is already at 5.4% and still climbing. Fears of more lockdowns may cause the Biden Administration to push for more handouts while simultaneously encouraging the Federal Reserve to print more money in the interim. This, in turn, will cause prices to go up.
In this scenario, there are two issues for investors to consider: the long and short term effects of all this money.
Asset Bubble in the Making?
The M2 (the broadest measurement of money supply) is already at its highest level since WWII and ultimately, unless we have some truly miraculous financial engineering, this will have the consequence of creating asset bubbles.
Nonetheless, you know the expression – ‘don’t cut off your nose to spite your thumb?’ It’s important for investors to recognize that in the near term, we are not at risk for a massive systemic 2008-like scenario. As such, as inflation permeates the economy, it will affect all assets…including stocks.
This is a long way of saying, you’ll want to still be invested. The smartest investors never bet against America.