The Biggest Crisis to Hit the Stock Market Since the Last One

What did we tell you a few weeks ago?

It’s impossible for the stock market to move up or down until the Wall Street whiz kids and mainstream media create a new catchphrase.

‘Debt ceiling’, ‘fiscal cliff’, ‘credit crunch’, and ‘Grexit’.

You’ve heard them all.

Each time one of those terms rears its head, the market falls. Then soon enough someone finds a ‘solution’ and stocks roar again.

Well, it looks as though we’ve got a new excuse for stocks to fall. And this one is the scariest of all.

It’s ‘The Sequester‘.

What does it mean and should you worry about it? We’ll let you know our view today…

For an explanation of The Sequester, here’s the Washington Post:


‘The sequester is a group of cuts to federal spending set to take effect March 1, barring further congressional action.

‘The sequester was originally passed as part of the Budget Control Act of 2011 (BCA), better known as the debt ceiling compromise.

‘It was intended to serve as incentive for the Joint Select Committee on Deficit Reduction to come to a deal to cut $1.5 trillion over 10 years. If the committee had done so, and Congress had passed it by Dec. 23, 2011, then the sequester would have been averted.’

In short, the US Congress and Obama Administration need to agree to cut a bunch of government spending, raise taxes, or both. If they don’t then it means a total of USD$85.4 billion in mandatory cuts spread across defence, discretionary spending and Medicare.

So, they’ve got just about a week to figure things out. Will they? Or will you see history repeat itself? Here, let us explain…

Stocks Fall Again, Will They Rise Again?
 

Yesterday the Australian share market dropped 118.6 points…or 2.3%.

Investors are worried. They’re worried the US Federal Reserve may turn off the money tap. If that happens the stock market will have to fend for itself.

Add that to The Sequester and you’ve got a recipe for a stock sell-off.

Now, we’re not about to say you should ignore this sell-off. No-one likes seeing their stocks fall. Your editor’s share portfolio fell 1.1% yesterday, so we feel it too.

But did we sell anything? No. And we’ve given the same advice to Australian Small-Cap Investigator readers.

As we said at the start, the market and mainstream investors are so insecure that they can’t buy or sell anything without an excuse. They need a big macro-economic disaster…and they need to give it a name.

They’ve done that before. So many times we’re bored of it. Here’s a chart of the US S&P 500 going back to 2007. We’ve overlaid data from Google Trends. The marks on the chart indicate the point at which each phrase reaches the peak in news headlines:

chart of the US S&P 500 going back to 2007
Click here to enlarge

 

Source: Google Finance, Google Trends

 

You remember the ‘Credit Crunch’. Headlines containing that phrase peaked in October 2008. The fear of a Greek exit (‘Grexit’) from the European Union peaked in May 2012.

And the Fiscal Cliff hit a crescendo in December…just before US stocks bagged a 9% gain in four weeks!

Each of these phrases has something in common – a short shelf life. The media reaches a frenzy, stocks sell-off and then…that’s right, politicians reach a bogus deal and the crisis is over…until the next crisis arrives.

Why This is Your Chance to Buy the Stock Market
 

That’s where we are with ‘The Sequester’. Use of the term has gone sky-high since the start of the year. Check it out for yourself on Google Trends (and sign up for Google+ while you’re there so you can follow our commentary throughout the day).

But we’re prepared to bet that you’ll see another eleventh-hour squib of a deal and they’ll avert the crisis…until the next time anyway. And you can guess what will happen then: stocks will take off, as we dare say part of the deal will involve more spending and/or more money printing.

And if we’re wrong? That’s why we hold dividend-paying stocks for income, cash for safety and gold for insurance.

This volatility and fake crisis solving is why we’ve gone on so much about spreading your money around into various asset classes.

If you’ve followed this advice, then yesterday you should have just sat back and enjoyed the view. There’s no need to panic sell when everyone else is irrational.

If anything, you should be ready to put some of your cash stash to work. We know cash is boring and it doesn’t do much for months on end, but this kind of stock market action is exactly why you need a cash buffer.

The Australian stock market dropped 118 points yesterday. And it could fall further today or next week. But when a stock you’ve followed falls to a price that’s attractive, you should buy it.

Despite yesterday’s move, we’re still more bullish than bearish, so we’ll use what we think are short term bearish moves as buying opportunities, and you should too.

Cheers,
Kris

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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