The market got up on the wrong side of bed Monday, after finishing weak last week. It remained in quite the mood today, with the Dow falling more than 100 points before snapping back later in the day.
So what’s caused the uptick in volatility this week?
First, we have the Federal Reserve. As you may recall, the Federal Open Market Committee (FOMC) stated last week that it would maintain interest rates at or near-zero through 2023, instead of 2022. That’s a whole extra year!
The news puzzled many folks, as the economic recovery looks V-shaped right now.
In fact, the Atlanta Fed’s GDPNow Tracker shows that GDP is set to grow at a stunning 32% pace in the third quarter after contracting at a near similar rate in the second quarter. We’re on a tear right now and we’re going to continue to have robust GDP growth.
So now Wall Street is wondering what the Fed knows that it doesn’t, which triggered some selling.
After the Fed’s shocking comments, the Bank of England (BOE) took everyone by surprise when it revealed that it was considering negative interest rates. Clearly, the ongoing coronavirus restrictions coupled with the tense Brexit negotiations with the European Union (EU) is weighing heavily on the U.K.’s economy. So, the BOE is seriously considering negative interest rates for the first time in its 326-year history. If rates are pushed into negative territory, the British pound will weaken considerably against the U.S. dollar.
The other news that made investors cranky Monday was a report saying several big banks, including Deutsche Bank (DB), JPMorgan Chase & Co. (JPM), BNY Mellon (BK), and Barclays (BCS), may have helped facilitate some $2 trillion worth of suspicious transactions, including many for suspected terrorists, drug dealers and corrupt foreign officials.
As a result, bank stocks took a hit, including Deutsche Bank, which was down nearly 10% Monday.
The good news is I don’t recommend any bank stocks to my subscribers. I’m a former bank analyst, and suffice it to say, the experience scarred me for life! We don’t want to own bank stocks in this ultra-flat yield curve environment anyway because banks don’t make as much money in these conditions. Instead, I’m focusing on the fundamentally superior stocks that are set to outperform in the third-quarter earnings season.
Last, but certainly not least, is the continued speculation surrounding the electric car companies, especially Tesla (TSLA) and Nikola (NKLA).
As you know, I’ve been critical in the past of Nikola’s flamboyant founder and (and now former) chairman, Trevor Milton. And I’m not the only one. The U.S. securities regulators and the Justice Department are investigating whether the company under his leadership misled investors about its claims to own proprietary technology.
Milton resigned Monday and NKLA shares tanked over 19%. His replacement is current Nikola board member and former General Motors (GM) executive, Stephen Girsky.
General Motors, which owns an 11% stake in Nikola, will keep working with the latter to expand its battery and hydrogen fuel-cell business as the auto-industry stalwart has ambitions to sell its own 1,000-horsepower electric pickup truck, the GMC Hummer EV.
So, it’ll be interesting to watch how Tesla performs following its annual Battery Day event today, in which it typically showcases what’s on the horizon for the key technology to the electric car company’s success — batteries. CEO Elon Musk said during a recent earnings call the event “will blow your mind,” but we’ll see. Investors sent the stock up 1.6% Monday, but was initially down more than 6% at one point today.
Part of the negative reaction is that Musk said plans that will be revealed during Battery Day will take until 2022 and beyond to carry out due to supply shortages.
With that said, here’s what I anticipate from Battery Day…
First, a cheaper Tesla using one of the company’s cheaper batteries could be in the works. Tesla gets its batteries from other major producers, including Panasonic (PCRFY), Contemporary Amperex Technology (CATL) and LG Chem.
The company has been working with CATL in particular to build a low-cost battery that doesn’t rely on cobalt, which is expensive and difficult to source, and is more lightweight and energy dense. Such a battery could last for one million miles and power an electric car that’s cheaper than gas-powered cars.
On the high performance end, Tesla could announce updates to its high-speed platform known as “Plaid.” (Fans of the 1987 comedy Spaceballs will recognize “Plaid” as the spaceship speed even faster than “Ludicrous,” which is the current top-speed setting for Tesla Model S performance cars.)
The Plaid upgrade is rumored to include software changes, as well as a new drivetrain, three motors and a bigger battery.
These would certainly be exciting new developments, but it doesn’t change one key fact: competition has arrived for Tesla.
Volkswagen began deliveries of its new ID3 electric car September 11 in Europe and started production of its ID4 crossover electric car. The company plans on making 1.5 million of the ID-series of cars per year by 2025. Renault’s Zoe electric car was a top seller in Europe in June.
In the U.S., Rivian is making electric pickups and SUVs with the backing of Amazon (AMZN) and Ford Motor (F). Lordstown Motors is another American electric company building an electric pickup that plans on selling its Endurance model starting next year.
All in all, though, it’s a fascinating time for the sector, and I’m excited to see what happens in the future as more advanced technologies like solid-state batteries come into play.
A Rare Market Event is Coming
However, I’m only interested in the fundamentally superior growth stocks, especially since the market is about to experience a rare event we haven’t seen in decades. I call it a Foreshock. If you thought the run-up from 2009 until now was impressive, you haven’t seen anything yet.
I believe stocks are poised to go much higher from their current levels. In fact, I’m predicting the Dow will hit 200,000 in the coming years. At its current level of about 27,000, it’ll have to rise more than 600% to get there.
I know that sounds crazy, but history proves otherwise.
Remember what happened after the huge run-up in stocks in the 1980s until 1991? The Dow went on a 234% tear during the ‘80s. And by the end of the decade, analysts and the media were calling for a market crash in the early ‘90s, much like some naysayers are today. Instead, the Dow surged almost twice as high in the ‘90s as it did in the ‘80s.
The bottom line: The stock market still remains the best game in town.
In my special Financial Foreshock Summit, I explain exactly why. (You can watch my free briefing here.) I’ll also share where I see the best opportunity to play the growth. I’ll give you a hint: it’s not Tesla or Nikola.
And if you sign up now, you’ll receive my Growth Investor Monthly Issue for October as soon as it’s released this Friday, which includes a brand-new buy in the healthcare sector. I encourage you to join soon so you can get in while the stock is still trading at bargain prices.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: