BEAR MARKET SHOWS ITS TEETH
Stocks up more than 13% since February
Fakeout? Or real deal? The most-hated bull market in Wall Street history still has disbelievers after a rocky start for stocks in early 2016 — and despite a rebound that erased all of the earlyyear losses.
Wall Street is debating whether the stock market rally since midFebruary that pushed stocks up more than 13% and back into the black for the year has real staying power or whether it’s a fleeting bounce that will end with the market reverting back to its earlyyear downward trend and lead to the first bear market, or 20% drop, since the 2008-09 financial crisis.
Doug Ramsey, chief investment officer at Leuthold Group, is one skeptic who thinks stocks are currently enjoying a “bear market rally,” or a brief period of rising prices that ends without new record highs and a bear market.
A loose definition of a bear market rally is a 5%-plus rally following a stock market correction, or drop of 10% or more, but which doesn’t result in a new record high.
What worries Ramsey? The Federal Reserve is embarking on a rate-hiking cycle. Stocks are selling at prices relative to earnings that are above long-term average valuation levels. Poor earnings momentum continues for U.S. companies. And market leadership is still dominated by “defensive” stocks and sectors, such as utilities and consumer
discretionary names. Typical bull market leaders, such as financials and banks, are not participating in the rally since mid-February in a major way, he adds.
“The quality of the rally is questionable, and that bothers us,” Ramsey told USA TODAY, adding that falling long-term U.S. government bond yields is also signaling stock investors’ economic forecast might be too upbeat.
Bear market rallies often lure unsuspecting investors back into the market, Ramsey says, setting them up for losses once the decline in prices resumes.
“Bear market rallies are dangerous because they look like a new bull market or what appears to be another up leg in a bull market,” Ramsey said.
Bulls counter by saying the aging bull, now in its seventh year, can continue to head higher and carve out fresh all-time highs before it rolls over for good.
Brian Belski, chief investment strategist at BMO Capital Markets, says he’s sticking with his call for this bull to last another eight to 13 years.
He says 2015 and 2016 are “transitional” years for the U.S. market, as it transitions away from old drivers, such as zero rates, credit-driven investment plays, emerging-market growth and commodity boom, and back toward “high-quality” U.S. largecap stocks.
“Being bullish is about faith and fundamentals,” Belski said.
Then there are Wall Street pros that are not mega bears or mega bulls.
“I’m cautious about the market, but not a bear,” Nick Sargen, senior investment adviser at Fort Washington Investment Advisors, told USA TODAY.
“The sell-off in January and mid-February was overdone, because the risk of China rolling over was low and the U.S. economy is fairly resilient to developments abroad. Thus, the rally since mid-February made sense. My main concern today is the decline in U.S. earnings since mid-2015. With valuations for the stock market at best fair, I think the upside is limited, and we could see negative returns this year, although not 20%.”