TIME FOR THE NERVOUS NELLIES TO SPOT OPPORTUNITIES
“If you can keep your head when all about you are losing theirs and blaming it on you.”
Thank you, Mr. Kipling. Keep saying it over and over.
I have three pieces of advice to all the Nervous Nellies out there: Turn off the TV, focus on the big picture, and review your asset mix so as to use this corrective phase and radical repricing of relative asset prices as an opportunity to rebalance the portfolio.
Many have pointed out that the five- per- cent plunge in the S& P 500 so far in 2016 is the worst start to any year, the very worst, since 1928.
Guess what? The S& P 500 closed that year with a 32- per- cent advance.
Much technical damage has been done and the rupture has shaved $ 4 trillion out the global market cap for equities just this week.
The ex- U. S. global market is in an official bear market, if defined as down 20 per cent or more from the highs, and that i ncludes the TSX as it endures seven straight days of decline.
There is talk of this being the end of the cyclical bull market that began seven years ago, but keep in mind markets everywhere were down sharply in 2011 and the U. S. market ended flat that year. Sounds a lot like 2015.
Commodities are woefully oversold — in aggregate, they are down to 17- year lows — and honestly, sust ained weakness in t he leading Baltic Dry freight rate i ndex is not a constructive signpost.
As if the rough ride in the world’s major stock averages isn’t enough, there is deeper carnage beneath the surface.
More than four in five stocks on the S& P 1500 are down 10 per cent or more — so clearly in corrective mode.
We have almost the entire high- yield corporate bond market trading below par, with yields averaging nine percent at a time when government bonds are one to two per cent.
This time last year, all I heard was how everything was too expensive and there was nothing to buy. Today we have a smorgasbord of asset classes and geographies cheapening up dramatically and all I see are deer in the headlights.
Isn’t this what value investors were waiting for?
Whether it is oil, the CRB commodity price index, the Canadian dollar, the relative performance of the TSX ( to the S& P), we are talking about more than one standard- deviation moves on the downside.
In other words, extreme.
The sharp widening in high- yield corporate bond yield spreads is getting very close to a one standard deviation event; pricing in a tripling of the default rate to 10 per cent (which would need a U. S. recession).
The TSX in absolute terms is already a one standard deviation event as well and this means a buying opportunity is in the making.
I sense that investors sitting on cash today and waiting for some bell to ring — I mean those investors with a three- to- five year view as opposed to a three- to- five month view — are going to wish they started to chip away now that the panic selling has set in.
You don’t want to buy at peak optimism; you want to do so at peak or at least near- peak pessimism.
As an economist, I cannot afford to hyperventilate — I keep my head as others lose theirs.
Bearish s e nti ment is heading to very high levels and as such my contrarian instincts are being aroused.
Go back to another two standard deviation event, back in March 2009 when the S& P 500 was plumbing the depths and investors were saying they would never touch the equity market again.
If I had told people to start buying in early 2009 because the markets were pricing in no value to the banks whatsoever, I would undoubtedly have been slapped around since the S& P 500 sank a further 25 per cent from the end of 2008 to March 2009.
But t hose who had a modicum of courage, a long- term view and a keen sense of value, recognizing how fear — that extreme primal emotion — can at times be a sign of weakness in others, were rewarded as the S& P 500 went on to enjoy a 23- per- cent advance for the year as a whole.
The deer in the headlights were left with their zero- per- cent yielding Tbills and bank deposits.
You once heard of Alan Greenspan di s c uss “irrational exuberance” back in 1996 — well, this may well be the reverse … “irrational pessimism.”
When I hear Dennis Gartman state emphatically that “cash, cash, cash” is the most optimal strategy, I have this sense that the worst may be behind us. Just because that was the strategy from the past five weeks, does not make it the best strategy for the next five months or five years for that matter.
ISN’T THIS WHAT VALUE INVESTORS WERE WAITING FOR?