How to Invest After Black Monday
Like dominos, the global markets plunged on Monday, sparked by concerns about the health of China’s economy. In the wake of the worldwide sell-off, many nervous investors are wondering how they should invest after Black Monday.
Global Markets Plummet on Black Monday
Even investors know how influential social media is. On Monday, August 24th, China’s Xinhua TV announced “Black Monday,” via Twitter nonetheless, that “China joins global panic selloff, dive 8.5%, worst since Asian financial crisis at midday.” (Source: Twitter.com, August 24, 2015.)
And stock markets around the world responded. Investors running for the exits helped wipe $1.0 trillion off global stocks in the worst trading day since 2008. The Down Jones fell an eye-watering 1,000 points before recovering while the FTSE hit its lowest levels since 2013, falling 6.7%. The DAX wiped out all its 2015 gains; while the resource-heavy TSX plunged more than three percent.
Was this a short-term correction or is it the start of something bigger? Admittedly, the vast majority of us cannot remember the Wall Street Crash in 1929. But it’s important to recall that there was more to the crash than Black Tuesday. The biggest hit took place on Tuesday, October 28, 1929, when the Down tanked close to 13%. But a series of successive falls occurring over the next six weeks added up to the crash.
So investors will have to wait to see if this is the tip of the iceberg or if it’s a short blip on the ticker of overt optimism.
Troubling Warning Signs Remain
The global markets may have rebounded in the days following Black Monday, but the fact of the matter remains; the global economy is no better off now than it was earlier in the week. In fact, one could argue, the markets are a little worse off.
I enter as evidence, in response to Black Monday; China’s central bank took the now-familiar step to cut its benchmark interest rate and freed up banks to lend more. But even that may not help it kick start the economy. The country doesn’t even need the help if you listen to China’s Prime Minister Li Keqiang, who, while acknowledging the country is feeling the effects of market turbulence, insists the economy is sound.
The point is; central banks are running out of tricks for propping up the economy. Whether it’s central banks from China, Japan, Brazil, or the United States; trillions of dollars have been minted and the global economy is still abysmal. And since stock prices are (or should be) based in large part on fundamentals, it’s only a matter of time until valuations and weak results come face-to-face.
And they need to. The markets are still seriously overvalued. The Shiller CAPE PE ratio for the S&P 500 stands at 24.60; still 50% above its historic average of 16.6. It has only been higher three times: in 1929, 2000, and 2007.
The volatile week on Wall Street could just be the beginning. Yes, the markets will seesaw, but the state of the global economy could easily derail the long-in-the-tooth bull markets in the United States and England.
Investing After Black Monday
The old adage of “buy-low, sell-high” may not be the soundest advice in troubling times. Most investors are too busy running for the exits to see the possible opportunities. But the fact of the matter is; Black Monday has opened the door to many great opportunities.
Instead of looking for investments that go up, consider those that you can profit from when the markets go down. And I don’t mean risky strategies like put options or shorting stocks.
Inverse ETFs (exchange traded funds) that short different exchanges are a great way to bet against the markets and profit from declines. Because they are inverse, they negatively track different exchanges and increase in value when the price of the underlying index falls.
ProShares Short Dow30 (NYSEArca:DOG)
The ProShares Short Dow30 (NYSEArca:DOG) seeks daily investment results (before fees and expenses) that correspond with the inverse (-1x) of the daily performance of the Dow Jones Industrial Average.
ProShares Short S&P 500 (NYSEArca:SH)
The ProShares Short S&P 500 (NYSEArca:SH) seeks daily investment results (before fees and expenses) that correspond to the inverse (-1x) of the daily performance of the S&P 500.
While most ETFs have a 1:1 inverse ratio, other inverse ETFs are leveraged two or three times. That means they will double or triple for every point the underlying index falls.
ProShares Short FTSE China 50 (NYSEArca:YXI)
With the global markets in turmoil, you can look for inverse ETFs that track indices outside the United States. Not surprisingly, the ProShares Short FTSE China 50 (NYSEArca:YXI) has been on fire; it entered August trading at $27.56 and on Black Monday, hit an intra-day high of $33.41; for a short-term gain of 21.2%.
Depending on what kind of ETFs your online broker or broker at the bank allows, you can also invest in inverse ETFs that track the FTSE, DAX, TSX, etc.