The Economic “Red Wedding” Begins

I love being right…Does that make me a bad person?

I have been warning for months that the market is overvalued, that the global economy is sick, and that stocks are headed for a fall. While CNBC and the rest of the clueless bulls break out the arm-bands, readers at Money Morning – who have been paying attention – should not have been surprised by what happened last week.

The collapse in commodity prices that began a year ago was a raging canary in the coal mine, screaming that something was wrong in the global economy. And that was the faltering of Chinese growth, which all along had been built on a fragile foundation of debt.

Just as I forecast two weeks ago, U.S. stocks saw their biggest weekly losses in four years. The Dow Jones Industrial Average plunged -5.8% or more than 1000 points to close at 16,459.75 and is now officially in correction territory, down more than 10% from its recent sugar high. The S&P 500 was not far behind, falling -5.77% to 1970.89. The S&P 500 is now down 4% on the year and has generated a negative return over the last 12 months. The high-flying Nasdaq Composite Index lost even more last week, collapsing by -6.78% to 4706.04. The small cap Russell 2000 fell -4.6% to 1156.79.
But these numbers don’t convey the hard, cold reality of the losses. Let’s put some meat on the bones. The U.S. stock market lost $1.4 trillion in value last week according to Wilshire Associates, with more than half the loss coming in Friday’s rout.

The world’s favorite company and investors’ favorite stock, Apple (Nasdaq: AAPL), has lost $72 billion in market cap from its recent high while Facebook, (Nasdaq: FB), Amazon.com (Nasdaq: AMZN), Netflix (Nasdaq: NFLX) and Google (Nasdaq: GOOG) lost a combined $100 billion.

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Shelter from These Storms in the Distance

In South Florida, we call the dog days of summer the “mean season,” as vicious thunderstorms move over the Everglades every afternoon and attack the east coast with lightning strikes and blinding downpours. We keep our fingers crossed that the storms won’t morph into hurricanes that can sweep the ocean over the land and cause catastrophic destruction.

After a period of intense hurricane activity in the early 2000s, it’s been ten years since we’ve been hit by any serious storms, and we are being told that strong El Nino conditions will likely protect us again this season. But we know that sooner or later our luck will run out, and we will be back in the eye of dangerous winds and storm surges. And, at least for a moment, we’ll wish we lived somewhere other than in paradise.

Stock market investors are experiencing similar feelings after a six-year hiatus from reality, courtesy of the U.S. Federal Reserve. Paradise is starting to give way to a very mean season…

The Dow Jones Industrial Average experienced its longest losing streak in four years, falling for seven trading days in a row. The Dow lost 1.79% on the week to close at 17,373.38 and has lost 1,000 points since its May 19 high of 18,312.39. The Dow is now down 2.52% on the year. Other indices are holding up better. The S&P 500 lost 1.25% to close at 2,077.57 and is now up 0.91% on the year, while the Nasdaq Composite Index lost 1.65% to close at 5,043.34 and is up 6.49% year to date.

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