It used to be said that when the US economy sneezes, the rest of the world’s economies got the flu. We are about to find out what happens when the Chinese economy is wheezing. Stocks around the globe plummeted on word Chinese real estate giant Evergrande Group could collapse. Some refer to it as China’s Lehman moment.
If you recall the subprime crash in 2007/2008, the government did not bail out Lehman Brothers brokerage and the company went under. Lehman crumbling set off a chain of events, causing stocks to get hammered and setting up the Great Recession.
Not to be out done, we have our own drama at home. Congress is up against the debt ceiling and Republicans said they won’t support a hike within the Democrat plan to spend $3.5 trillion. Senate Minority Leader Mitch McConnell says Democrats can pass the bill without the support of the GOP and wants nothing to do with the Democrats’ spending plan. Additionally, Federal Reserve minutes revealed the Fed could be ready to hike interest rates.
The trifecta of worrisome news items hurt stocks as the indexes dropped by at least 1.7% with the NASDAQ down 2.19%. Small caps took the worst of it with the Russell 2000 slipping nearly 2.5%.
September is clearly off to a rough start.
The question is what to do now? Stocks could have some downside with upside potentially limited. Since the NASDAQ is below the 50-day moving average of 14,876ish, the trendline is likely to act as resistance and attract sellers. Meanwhile, the index bottomed out at 14,530, which could act as support should stocks continue to fall. That means the index is technically in no man’s land.
Investors will have to sit back and wait to see if the NASDAQ can break through its 50-day moving average before falling below 14,500. Then we’ll have a sense of whether the current selloff is a short cold or possibly develops into a more serious financial illness.
Medical Devices and Health Care did great last week as four of the top six performers. However, with the market dangling in uncertain territory, it’s way too risky to think about putting any new money into any sector or stocks.
Investors should be cautious adding new dollars to stocks. Sure, getting some of your favorite stocks at current levels is tempting, but they could get much cheaper in the days/weeks ahead.