James Hyerczyk
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Stock Market Risk
Stock Market Risk

The major stock U.S. stock indexes are under prices early Monday on position-squaring and profit-taking in reaction to the news that China cancelled trade talks between the two economic powerhouses, and ahead of the Fed’s interest rate and monetary policy statement on Wednesday.

The reaction by investors is understandable since it does cause uncertainty and we know from the past that investors don’t like uncertainty. Traders don’t seem to be too surprised by the news, or perhaps it’s the way China made the announcement. There wasn’t much fanfare when it announced the postponement of the meetings on Friday and it appears it did not intend to shake up the markets. Furthermore, it allowed investors time to assess the situation before making trading decisions.

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If China had decided to make the announcement on Monday, during market hours, I think we would’ve seen more pronounced selling pressure.

The Fall and Fall of General Electric

In other stock market news, shares of former bellwether stock General Electric hit a new 9-year low on Monday, dropping to levels not seen since July 22, 2009. During the early 2000s, this stock was probably the number one holding in nearly all major portfolios. Additionally, it once held the position currently held by Apple – the company with the highest market valuation.

This just goes to show us that despite talk of the stock market rally being fueled by a dovish Fed policy, sales and earnings do play a major role in determining its value. GE was worth nearly $600 billion in August 2000 – a time when it was one of the most valuable companies in history. Since then it never fully recovered by the big hit it took during the financial crisis of 2009.

Investors are saying that its share prices are being driven down by a series of events including unrealistic financial goals, poorly timed acquisitions and even mismanagement of the company’s cash. Furthermore, investors feel the company is being dragged in too many directions due to its many business interest. It’s also under investigation by the Securities and Exchange Commission. Traders are also saying that its once extremely popular finance arm has “zero equity value.”

I bring up GE, not to pour salt on the wounds of investors, but because investors should be aware of the fact that a company’s fortune could and will turn quickly if the professional investors see even the smallest chink in its armor. So keep that in mind when you watch companies like Apple and Amazon straddle the $1 trillion dollar barrier. Both are involved in multiple businesses and multiple product lines.

Apple already went through severe final stress in the early 2000s, and was able to recover. Additionally, major corporations like Microsoft, Walmart and General Motors, all at one time shared the top valuation spot. And although they are still worth a boatload of money, being the highest capitalized company in the world tends to make your shares a target.

Eventually, the buying dries up as investors raise issues about valuation. Then the short-sellers start to pile on. Eventually, one or two of its businesses begin to fail. While Apple and Amazon continue to move along a profitable path, investors should keep an eye out for soft patches that could signal problems.

Amazon is one company to keep an eye on as it plans to move into the pharmaceutical, healthcare and transportation businesses.

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