Unstoppable force, say hello to immovable object. The highest interest rate hikes in several years are hitting massively indebted governments, banks, property developers, and consumers around the world. The collision has put a stop to the stock market rally, at least for now.

The minutes of the Federal Reserve’s July meeting, released Wednesday, rattled Wall Street because of their hawkish tone. The meeting summary stated: “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

Those words landed with a thud on Wall Street. Stocks have been reeling ever since. U.S. Treasury yields have risen to 16-year highs, as investors expect the Fed to continue tightening longer. The benchmark 10-year Treasury hovers at 4.27%.

Economic optimism, which had been rising in recent weeks, has turned downbeat again. Leading the stock market’s decline have been the mega-cap technology stocks, which had enjoyed a big run-up in recent months due to positive earnings surprises and exuberance over artificial intelligence (AI).

A breather, especially in the hot tech sector, was to be expected. In my view, a consolidation phase is healthy after a powerful rally in stocks, particularly among growth and AI-themed plays.

But headwinds are gathering strength. The Fed is back to sending mixed signals: dovish one day, hawkish the next. Liquidity is the name of the game, so until the Fed provides definitive clarity on monetary policy, the roller-coaster ride will continue.

Read This Story: U.S. vs China: Deciphering The Geo-Economic Puzzle

Developments in China have added to the bearish sentiment. The country’s second-quarter gross domestic product (GDP) growth widely missed expectations, with alarmingly high unemployment levels.

China’s economy expanded by just 0.8% from April through June compared to the first three months of the year (see chart).

It’s not just a bad quarter. China’s residential and commercial property market, which drives about a third of the country’s economy, is on the brink of implosion. China’s overall debt has risen sharply over the past decade, mostly the result of credit funneled to state-owned enterprises and dubious construction projects. China is plagued by legions of “zombie” companies.

The next time someone tries to tell you that China will soon surpass America and dominate the world, don’t you believe it.

The latest Chinese shoe to drop was Thursday’s bankruptcy filing of giant property developer China Evergrande Group (OTC: EGRNF). The debt-hobbled developer filed for Chapter 15 protection in U.S. court.

Evergrande has the bleak distinction of being the world’s most indebted property developer. In July, Evergrande posted a combined loss of $81 billion over the past two years. Evergrande’s operations are pervasive throughout Chinese society. The fear now is that the developer’s woes will trigger financial contagion in China that will spread internationally.

Country Garden Holdings (OTC: CTRYF), another huge China-based property developer, stoked fears as well, when it missed payments this month on its massive debt. Pivotal banks and asset managers, such as BlackRock (NYSE: BLK) and UBS (NYSE: UBS), are saddled with major exposure to Country Garden.

On Friday, the main U.S. stock market indices closed mixed, in choppy trading, as foillows:

• DJIA: +0.07%
• S&P 500: -0.01%
• NASDAQ: -0.20%
• Russell 2000: +0.51%

The indices closed lower for the week. The NASDAQ on Friday posted its fourth day of declines in a row and shed 2.6% for the week, its third consecutive week of losses. European and Asian stocks slumped this week as well. Bullish sentiment also is waning in the oil markets, with crude prices slumping about 3% this week.

August has been a painful month so far. It seems that investors are reconsidering the optimism they felt in July, when the soft landing narrative held sway.

The doctor’s prognosis…

When market conditions become fraught, I often turn to my friend and colleague, Dr. Joe Duarte, for insights. In addition to being a medical doctor, Joe also is chief investment strategist of our premium trading service, Profit Catalyst Alert.

During any given trading day, Joe and I exchange opinions, usually of a sardonic nature, on the telephone or via Slack. He’s one of the smartest (and wittiest) analysts I know. He sent me this message via Slack today, which I’ve decided to share with my readers:

The current problems in the stock market are due to the problems in the bond market. That’s because bond traders are worried about inflation. The problem is that the inflationary news such as the labor market’s strength are being countered by equally soft news such as concerns raised by major retailers about the future of the economy and the ongoing decline in the Leading Economic Indicators Index (LEI) and more obscure items such as the collapse in shipping rates across certain regions of the globe.

When you throw in the potential implosion of the Chinese economy, you’ve got to wonder if bond traders aren’t reading the John Persinos columns about the benefits of psilocybin before they go to work. From an investment standpoint, the best approach is to monitor each individual stock position on its own merits as well as considering the overall supply and demand status of its industry. That means that investors in the housing and oil sectors should be very patient while those who’ve recently made big profits in technology may consider taking profits while they’ve still got them.

One last thing to consider is that the level of pessimism in this market is starting to climb to levels which often precede some sort of bounce, which means that just as anyone is getting ready to do some selling, the market may turn around. Maybe they’ve been slipping psilocybin into after-hours drinks for stock traders too.

I’ll give the good doctor the last word. You should also know that Dr. Duarte has just pinpointed a tiny, unknown company that has developed a revolutionary “black box” technology.

You need to get in on the ground floor of this game-changing opportunity before the investment herd finds out and sends the share price soaring. Click here for details.

John Persinos is the editorial director of Investing Daily.

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