FYI | Mar 16 2016
By Peter Switzer, Switzer Super Report
After seeing our stock market go up over 10% since the February 10 low, which was just after we went into bear market territory for a day, the question we have to ask is — are we in a correction within a secular bull market, a cyclical bear market within a secular bull market or are we in a cyclical bull market in the start of a secular bear market?
A secular bull or bear market lasts for many years and inside them there can be a temporary bear market. As Robert Lenzner writing on the Forbes website pointed out: “At least 3 of the bear markets last six months or less, not that long to absorb the pain.”
If we count the start of one on February as a bear market based on the 20% rule, then this could be the shortest ever or it could be a short reprieve before another testing of the downside.
A news.com.au story explained that “This is just Australia’s fourth since 2000, while the US has only suffered two bear markets in that time,” it said. Dr. Shane Oliver of AMP Capital told the website that “long bear markets tend to happen when economies are in a recession — such as the Global Financial Crisis or the mid-1970s in Australia.”
So that builds my case for the positive and for sticking with stocks.
Fund managers like WAM’s Geoff Wilson thinks we will experience bear-like market conditions until around October and he’s not the first fund manager to say that. They could expect the old “sell in May and go away” to work this year but they also look at valuations of companies if they can’t see numerical reasons to buy, they hold a fair bit of cash and wait.
Three big things could change their valuations and their numbers: better economic growth than expected, improved profit and outlook statements from companies and lower interest rates.
The first two apply to Australia now and the third is a possibility, as the dollar rises maybe forcing the RBA to cut rates.
Internationally, the world economy is getting downgraded economic growth but the rate is OK, company results as well as outlooks have been mixed and rates are going so low that they are negative!
Most of the good news coming for stocks overseas, leaving out the USA, is coming from the central banks and a possible OPEC-created production freeze!
We’re also seeing iron ore and oil prices rise but no one is clearly arguing that demand for resources is actually rising. They seem to be saying the sell off was too hard and now short sellers are taking evasive actions and so prices are going too high.
There are good reasons to be suspicious about the good reasons that took us out of that bear market for one day. I hope they will be sustained but one crazy move from the Bank of Japan, the Fed and OPEC between now and Sunday — March 20 — and the buying enthusiasm could easily switch to selling.
This is why I am not my old bullish self. Look, if I’m too optimistic and we see lower levels on stock markets, I will be a buyer of quality companies because I think with interest rates so low, stocks by default, are more attractive.
In the US, bull markets have lasted 97 months on average, so some have been longer, while others have been shorter. Given our crazy interest rate environment, then this could easily be a longer bull market with a short cyclical bear market inside it or it really is just a correction. The Yanks had a correction, not a bear market, with the S&P 500 falling 14.4% and that makes me think our one-day bear market was really a correction.
Average US bull markets add 440 points but this makes less sense because the higher the starting point, the less relevant is the point advance. A 440 point gain on a starting point of 440 would be 100% but on a starting point of 880 it would be 50%.
In the 1990s, the bull market saw the S&P 500 index go up 816.5%, which ended with the dotcom bust. The next bull market went up 800%, until the GFC took away a tick over 50% of investors portfolios if they matched the index!
Depending how you calculate it, the US market was up about 200% since the GFC low was hit in March 2009, so on the 1990s standard we could easily have a lot more upside in this market.
I know there are doomsday merchants tipping a long bust but for the Oz economy, and therefore our stock market, I think the real threats are from overseas. If the QE program in Europe does not breed economic growth and China proves to be all talk and no action, then we could be locked into a bear market.
Billionaire investor Warren Buffett once said you should not invest in a stock that you were not prepared to hold for 10 years. That said, a news.com.au story pointed out that Aussie share prices are sitting almost exactly where they were 10 years ago — and 30% below their 2007 record high. It concluded “so long-term investors are right to feel frustrated” but that’s if they only bought in in 2006 or early 2007.
One of the greatest investors of all-time, Sir John Templeton, told us that “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria” and I just have not seen euphoria anywhere. I’ve seen some optimism in the US and a bit in Europe and even here when we nearly broke 6000 in March last year but skepticism took over.
I could be wrong but I think arguments that we are in a long, slow economic recovery means we have a long slow secular bull market that will have some cyclical corrections and even a cyclical bear market but it will be replaced by bullish moves high, provided we eventually see global economic growth respond to QE and negative interest rates.
Our economy is one of the best in the world — 25 years of growth without a recession proves that — and our current rate of growth beats most economies other than unusual Asian ones such as China. Meanwhile the US has responded to its QE and its government’s fiscal stimulation so we’re in a waiting game situation.
If you’re a panic merchant and uncommitted long-term investor, maybe you should go to cash and buy in when we see market lows but for me, I’m happy playing the long game.
The chart below makes my point.
The blue line is capital gain from the index but the red line throws in dividends! These lines show some ups and downs but the main trend is up! It’s up to you to learn how to cope with the down times.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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