Waiting for the Bottoming to Begin

 

The stock market’s dive yesterday confirms my belief (and Cabot’s trendlines) that the current stock market correction is not over. In my opinion, the renewed squabbles in Congress could bring us to the brink of another government shutdown sooner or later. Investors on Wall Street are unhappy when Congress tarnishes the reputation of the U.S. in the eyes of the world. Global investors will likely invest their trillions in markets outside the U.S. if our legislators continue their childish food-fight mentality.

In addition, worries about slowing growth in China are real. The Chinese government reported GDP growth at 7% for the first six months of 2015. According to a Bloomberg survey, GDP in China grew at a 6.3% rate in the first half and will likely grow at an even slower rate in the second half. The discrepancy in the GDP numbers is caused by China’s well-known tendency to embellish economic data. Car sales and bank deposits are growing faster in the U.S. than they are in China, which leads me to conclude that U.S. investors will continue to see further disappointing results from the Asian behemoth.

However, the U.S. stock market is down substantially during the past couple of months and has discounted most, but not all, of the bad news. The stock market is impossible to predict. If the current correction in stock prices follows previous patterns, we will likely see prices somewhat below the August lows sometime within the next three to six weeks. Then, a bottoming process could begin which could lead into a year-end rally. The danger that could cause the stock market to slide a lot further would be if the U.S. government shuts down.

I recommend continuing to hold your defensive investments until the bottoming process begins and the bickering in Washington subsides.

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