Wall Street went into a meltdown and suffered its worst day this year, which guarantees an ugly start to trade on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today with the SPI futures predicting a 1.7% loss.
It's revenge of the nerds!
Disciplined value investors have been sitting out the latest rally and looking like Chicken Little as they ran around warning of the day of reckoning.
These warnings had fallen on deaf ears, until yesterday, and we can point our finger at China and the US for triggering the sell-off.
US President Donald Trump labelled China a "currency manipulator" in response to the Asian nation's move to allow its currency to fall in value against the greenback and to stop all agriculture imports from the US.
Trump's move is largely symbolic and is nothing compared to his decision to slap tariffs on just about every Chinese made good brought into the US, but it shows that both sides are moving further away from a resolution.
This is bad news for the global economy and ASX investors will be asking these three questions:
Is this a buying or selling opportunity?
The answer is probably both! I believe the market is primed for a sell-off after staging big gains in 2019 and a correction is healthy.
Stocks will bounce back as central banks will rush to pump their respective economies with cheap and accessible credit. As the GFC has shown us, such measures can be effective and this sell-off is not even close to being a crisis like the one in 2008.
The thing is, I don't think selling pressure will ease quickly and we should brace ourselves for more losses in the short run. Cashed up investors will want to stagger their buying. There's probably no need to rush.
How long will the meltdown last?
It's almost impossible to predict this but it's worth noting that the next US Presidential election is November 3, 2020.
Trump has already started his re-election campaign and he won't want to see the US economy crash into a recession as voters head to the ballot box.
He can't play the long game like President Xi Jinping who has a lifelong seat at the head of his country's table.
Encouragingly, Trump is a wheeler and dealer. He doesn't fight on principles but seizes opportunities. I am betting (and so is the Chinese) he will be motivated to find a way out of the conflict.
What stocks should be on the watchlist?
If this plays out as I am hoping, I suspect value stocks will be in vogue compared to growth stocks trading at large premiums.
The latter group has dominated the spotlight and outperformed value over the past year or two, and I think this shake-up could see the tables turn.
