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Is It Time to Get the Bear Market Cufflinks Out?

bear cuff links

Is It Time to Get the Bear Market Cufflinks Out?

It’s been a while. In fact, I think I bought my cufflinks when there was no such thing as business casual. In other words, a long time ago!

I was in business school during the 1987 crash (so that does not count), went through the 2000-2002 bear market as a growth manager and hopelessly repeated the experience in 2008.  I do not recall those markets with any fondness. Learning opportunities yes, but painful nonetheless. I still would have preferred watching a three day long cricket match!

It sure feels like we are entering one of these ugly markets again.  I did not think that we were going to have such a nerve wracking start to the New Year, but Bear Markets are unpredictable.

While the warning signs were there for subdued equity market returns – high valuations, little to no EPS growth, collapsing commodity prices – our research still favored risky assets over safer investments such as Treasuries.  Especially in a low inflation, accommodative monetary policy environment.

We have been in the “low return environment” camp for a while now, but have favored over-weighting equities and REITS over long-term horizons.  But as Keynes once said “in the long-run we are all dead” so that leaves us to live our investment lives in the present. And that is precisely the problem.

With all this noise around us the fundamentals start looking fuzzy.  We know it’s been bad but just how bad?

Technical Stage Chart 1-18We use our Technical Classification system to learn about the positioning of the overall equity market.

Our system employs 50 and 200 day moving averages in relation to the current price and classifies each stock into one of six technical stages.

Currently, 60% of stocks in our global universe are in the Down Trend Stage these are Bear Market numbers!

Bear Markets are typically categorized by a large proportion of stocks in the Down Trend Stage – typically 60% or more.

In the early stages of a Bear Market the next highest proportions tend to occur in the Deteriorating and Break Down Stages – these are stocks that most often were the last Up Trend stocks of the now gone previous Bull Market.

The situation as of mid-January resembles that of an early stage Bear Market.

  • 60% of our global sample is in the Down Trend Stage.
  • 18% are in the Break Down and 9% in the Deteriorating Stages.
  • Only 8% of our global sample is in the Up Trend Stage – as of a year ago that number stood at close to 60%.

Is the whole global equity market in the Down Trend Stage? Let’s look at some equity markets around the world.

Down Trend Stage Graph 1-18In the US things have been nasty (only 6% in Up Trend) but things have actually been worse north of the border in Canada where 81% of stocks are in the Down Trend Stage.

In China 62% of companies reside in the Down Trend Stage.

Among the largest markets only Germany and Japan enjoy less than 50% of stocks in the Down Trend Stage.  All of these numbers are significantly higher than 30 days ago!

The highest pain market is Brazil. Somehow, I doubt that the “Olympic Games” effect will be sufficient to offset the downturn in equity values.

Is this the beginning of a Bear Market or just a Correction?

Equity Market turning points are, in our opinion, impossible to predict with any reasonable amount of confidence.  Our approach examines the weight of the evidence and as of now we still believe that we are in a correction rather than in the early stages of a Bear Market.

Our perspective is that equity markets are in for a long-period of below average returns, but not a Financial Crisis type of meltdown. In a slow growth, low cost of money environment our research still favors risky assets such as equities.  We would view the current period of market stress as an opportunity to deploy capital at more favorable return-to-risk terms.

 

Eric J. Weigel

Managing Partner

eweigel@gf-cap.com

 

DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS. SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL.  IS NO

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