Back in the skepticism phase – hence bull is intact
“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”
— Sir John Templeton
THAT is one of the Templeton founder’s timeless quotes which investors continue to use today as a guide for the market’s direction.
With global markets back to terrorising investors this week, perhaps it’s time to head back to our basic stance – which investment phase are we in right now, with regard to Sir John Templeton’s investment cycle?
For the most part of 2017 and the early part of 2018, I daresay the market was in the optimism stage.
However as President Donald Trump began his trade war against China, and markets worldwide took a beating, not just from trade-related rhetoric, but also age old fears of interest rate hikes, Brexit and emerging market fears, markets appear to have reverted back to the skepticism stage.
Now that should be good news. It means this bull market has more legs to go, despite the ongoing rout which is most definitely shaking investors’ confidence.
Most investors were expecting markets to take a turn for the better following the end of the midterm elections.
The US mid-terms saw the Democrats taking the House while the Republicans held the Senate. In other words, this means Gridlock - which is good for markets.
However, stocks spent the better part of November trading in lacklustre style before having an extremely rough week this week.
On Tuesday, the Dow tumbled 640 points within the last hour of regular trade, led by a sharp selloff in energy as oil price plummeted.
Now the Dow Jones is 1.03% down on a year to date basis.
Both the S&P 500 and MSCI World Index are down 0.89% and 15.83%, both close to their year lows.
Unnerving surely. However this is a good cue for us to remember that we cannot time the end of a correction.
Instead of fretting and wishing when this will end, Fisher MarketMinder Research says that double-bottom corrections aren’t unusual.
“With absent new, fundamental, huge negative developments, the bull market should ultimately reassert itself. Being ready for that, in our view, is more important than pinpointing the date it happens, reminds Fisher Investments MarketMinder.
Wouldn’t it be great if every correction followed its traditional recipe of a 10% pullback, followed by a quick rebound and hence forming that perfectly shaped V chart.
Nonetheless in the real market, markets are messy and uncertain. They curve, bend, go up and down for no particular reason.
Important insight
Fisher Investments MarketMinder provides another important insight – history shows corrections frequently test their low two or more times before rebounding.
“The S&P 500’s winter time correction featured two bottoms – one in early February and one in March. Earlier in this bull market, the 2015 to 2016 correction was more of a W than a V, and 2011’s twin corrections also resembled a large W. Both were painful at the time but now look like mere speedbumps on the way to further gains,” it says.
Of course Fisher Investments Marketminder says that with every correction, comes the possibility it could actually be a bear market – a deeper, longer grind worse than -20%. However magnitude isn’t the only difference S&P 500 Vs and Ws during this bull market between a correction and a bear.
Fisher Investments MarketMinder says that corrections start for any or no reason – they are products of investor sentiment.
Bear markets, however, have identifiable fundamental causes. One of the reasons they typically start more slowly than corrections is that investors are generally in better moods and don’t see the fundamental negative. So as stocks start rolling over, folks see it more as a buying opportunity than a reason to panic – the mentality they would ideally muster in a correction but don’t, because controlling emotions around money is hard.
Current landscape
So under these circumstances, the best thing to do is to survey the landscape and see what markets are dealing with.
What are the headlines like? Today, most of the headlines are those that have been rehashed again and again – an impasse on the US-China trade war with a lack of formal statement during last weekend’s Asian economic sum- mit, Brexit deal not going smoothly, higher interest rates, oil prices plunging and weaker home sales among others.
Now, nothing in the variation of this news is fundamentally new.
Fisher Investments MarketMinder notes that none of these issues has the power to shave a few trillion dollars off global GDP, which is what it would take to spark a global recession.
Putting things into perspective, all current tariff threats amount to around 0.3% of world GDP, using the IMF’s latest estimate of output.
Meanwhile, rate hikes aren’t contractionary unless they invert the yield curve, which the Fed remains reasonably far from doing.
“Overall, we think stocks have far more positives going for them than negatives. Uncertainty is high right now. But as it fades, relief should ultimately power stocks higher, in our view. Maybe not today, tomorrow or next week. But at some point the tide should turn. Being invested in accordance with your long-term goals, rather than trying to dance around volatility, is the best way to be ready,” it sums up.
Sometimes corrections churn a bit before rebounding