Article Highlights:
- The S&P 500 dropped over 6% in August due to trade war fears.
- There’s a historic amount of uncertainty on Wall Street.
- This is actually bullish news for the overall market and the economy.
Last week, I joined 21 million other Floridians in preparing for Hurricane Dorian.
At the time, it looked as though Florida was going to be hit with the strongest hurricane since the Labor Day hurricane of 1935.
My preparations included a trip to Costco to fill a cart with bottled water, a 10-year supply of flashlight batteries and what looked like a year’s supply of canned soup.
I also waited in line for an hour for gas, while burning a quarter tank keeping the air conditioning running.
As Florida braced for the storm, however, Dorian’s course changed entirely.
Instead of slamming into our state, it took a northerly turn after it completely wrecked The Bahamas for a few days.
Floridians breathed a sigh of relief. Most of Florida had dodged the bullet.
I struggled to understand how it was possible for the hurricane forecast to be so wrong. And this isn’t the first time in recent memory that’s happened.
Floridians faced a similar situation three years ago, when Hurricane Matthew was expected to rake the Florida coastline as a Category 5.
That one also managed to stay offshore. Matthew produced tropical-force winds and rain in some areas. But its impact was minimal compared to the apocalyptic forecasts.
As I waited in line for gasoline last week, I started thinking about how investors are constantly faced with similar stock market doomsday forecasts that never come to fruition.
For the last 10 years, all of these doom-and-gloom predictions have been buying opportunities.
And when my colleague Matt Badiali shared a chart of Wall Street’s forecasts, I realized another buying opportunity had arrived…
There Is Money Lying in the Corner
Before I tell you about this astounding piece of research that’s mega bullish for stocks, I want to tell you a story.
As a young trader, I was always reading interviews and books about famous traders to get inside their heads and understand what made them better than every investor on the planet.
One interview with Jim Rogers, co-founder of the Quantum Fund and Soros Fund Management, stood out to me in particular.
He was asked about his winning strategy and what made him so successful. He replied: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
How exactly does one know when “there is money lying in the corner”?
Well, a good indicator is when other investors are uncertain of what lies ahead.
That means they’ll become buyers if the market starts moving higher.
Uncertainty Is Opportunity
This brings me back to the chart my colleague shared on Twitter…
The really interesting thing is that in 2007, analysts were most confident of the year end estimate. pic.twitter.com/1cjXtgpE62
— Matt Badiali (@MattBadialiGuru) September 4, 2019
The most optimistic estimate for the S&P 500 Index is 176 points higher than the most pessimistic estimate.
That means there’s more uncertainty among Wall Street strategists than there’s been in 20 years!
Between the overseas slowdown, trade uncertainty and the inverted yield curve, Wall Street is scratching its head.
And when there’s uncertainty, there’s also opportunity.
That’s when the money is lying in the corner — when nobody knows what to do with it.
We Didn’t Get Hit With the Big One
In August, the market weathered its own storm. The S&P 500 dropped over 6% from all-time highs as President Donald Trump tweetstormed more tariffs on Chinese goods.
As the S&P 500 dropped, so did the yield on the U.S. 10-year note, from 2.05% to 1.52%. That eased credit conditions in the U.S.
Additionally, the escalating trade war (and falling market) increased the odds that the Federal Reserve would cut rates further.
In early August, there was a 37.4% chance of 75 basis points of cuts after the Fed’s December meeting. That’s risen to 48.4%.
The Fed is now more dovish at the same time the Trump administration is planning on holding talks with Chinese leaders in Washington next month.
I think the president is going to want to end the trade war, thereby bolstering both the stock market and his reelection chances.
To investors, August was like the Category 5 hurricane that never really materialized.
There was a great deal of volatility, and one of my favorite signals gave us a “buy” reading.
But we didn’t get hit with the big one.
Prepare for the Worst and Expect the Best
The fear of what may have been caused investors to run to safer, defensive assets such as gold and government bonds. It was like stocking up on bottled water before a hurricane that never hit.
The increase in the odds of further rate cuts means investors will likely migrate back to what was working all year: growth and tech.
And that’s bullish for the overall market and the economy.
If there’s one thing this recent brush with doom has taught me, it’s to prepare for the worst and expect the best.
At least I’ve got enough batteries for when the big one hits.
Regards,
Ian King
Editor, Automatic Fortunes