This has been the worst start to a US stock market year, ever! This is how the USA Today website put it: “The Dow Jones industrial average closed down 167.65 points, or 1.02%, to 16,346.45, putting it more than 10% below its record close last May and back in correction territory.
The blue-chip barometer had been up by almost 140 points earlier in the session. The Dow finished the first week of trading in 2016 down 6.19% — its worst five-day kickoff to a year ever, according to S&P Dow Jones Indices.”
Yes, even worse than anything the Great Depression threw up! And it’s unsettling when you focus on the well-worn market rule of thumb: “As January goes, so goes the year.”
Has this turned me from a bull to a bear? I always promised that I’d tell you when my case for optimism had changed and this start to the year looks like the one that could easily rattle the confidence I’ve had for stocks since 2009.
History doesn’t always give you a reliable guide to what will happen but you know I don’t easily ignore some of its lessons.
A guy who has read the historical tea leaves on stocks for decades is Sam Stovall, the number cruncher for Standard & Poor’s Capital IQ division. I interviewed Sam in New York last year and I respect his work.
This is what he said about January in 2009: “Since 1945, whenever the S&P 500 advanced in January, the market continued to rise during the remaining 11 months of the year 85% of the time, posting an average price advance of 11.6% — substantially more than the 8.2% return recorded by the S&P 500’s 12-month price appreciation for the past 64 years.
Whenever the market declined during the opening month of the year, the S&P 500 fell an average 2.2% for the remaining 11 months. Its frequency of success, however, was no better than a coin toss at 48.”
By the way, 2009 ended up being a huge year for stocks, so let’s hope that’s an omen for us this year.
Of course, January is not over yet but the S&P 500 has lost 5.6%, while our own S&P/ASX 200 index is off 5.7% before today’s rout, which is not a great start. And right now the list of bads are KO’ing the goods list, as my list below shows. Here are the bads:
- The slump in oil prices — the economic benefits seem to be ignored and the focus is on the companies that lose from the lower price;
- The Saudi Arabia/Iran conflict;
- North Korea and its so-called H-bomb;
- Weak Chinese economic data;
- The depreciating yuan, which has led to speculation of a currency war;
- The Chinese stock market sell off, which led to two days when the market fell over 7% and was shut down;
- China’s economic slowdown and its impact on emerging economies, as well as some mixed economic data from the US has seen the World Bank downgrade its global economic growth forecast from 3.3% to 2.9%; and
- Worries about how fast the Fed will raise interest rates.
Against these, here are the goods:
- The US job numbers over the weekend show the US economy is pretty good. There is debate about the numbers but I like this from Goldman Sach’s chief economist, Jans Hatzius: “This was a good report. If you wanted to pick holes in it, you’d say there’s a big weather effect in it, but it’s hard to really get nervous when it’s 292 [000], even if you subtract a lot from it, say 40,000 or a little more, it’s still a good number.”;
- US earnings forecast for 2016 is up 8% and I hope the smarties are right on this;
- This is what the European Commission said about its economy a month ago: “The economic recovery in the euro area and the European Union as a whole is now in its third year. It should continue at a modest pace next year despite more challenging conditions in the global economy”;
- On Japan, this what Focus Economics has predicted: “Although the slowdown in emerging markets is weighing on Japan’s economic performance, growth will pick up slightly next year on the back of resilient private consumption.” A 1% economic growth figure is the forecast, which is better than recession;
- The panel of economists for the Focus Economics survey came up with this conclusion on China: “Panelists surveyed for this month’s Consensus Forecast maintained their 2016 GDP growth projections at last month’s 6.5%. Panelists see the economy expanding 6.2% in 2017.” If these people are right, this is not an economic collapse, so the stock market reaction to China since New Year’s Eve has been excessively negative; and
- The central banks of the world are still in there firing policy bullets to get growth up and if they succeed, stock prices will head northwards.
If the US was really going backwards and China forecasts were for a 5% or 4% number, I’d be growling like a bear.
For me to turn bearish on what I’ve seen so far would be like me walking out on a Roosters game 24 minutes from the end because they were down 30-0. That was the case in the grand final qualifier in 2014 and the chooks ran out winners 31-30!
You’ve got to have faith if you’re a footie fan and also when you’re a long-term investor. Sure, there could be a 10% correction because markets get over-confident, for example, our market before New Year when the Santa Claus rally was around 8%.
While the latest news has changed some key stock-players’ valuations, however, a lot of these big speculators are short-termers who often get out of the game way before the full-time whistle blows.
And while I don’t like the scary list of bads I provide above, I do like the take on the year ahead from Jeremy Siegel, the finance professor at the University of Pennsylvania’s Wharton School, who thinks the US stock market could rise 8-10% this year. He told CNBC that the US economy looks “better than a lot of people” fear and argues the Fed will go easy on rate hikes if the global/market economic news is too worrying.
Another good omen to keep me bullish is the rate of exits from US investment funds is not a stampede. Michael Harnett, who is chief investment strategist at Bank of America Merrill Lynch, points to what he called the “Global Breadth Rule”. He reckons it’s showing a contrarian “buy” signal, with 88% of all global equity markets trading under their 200-day and 50-day moving averages.
Sure I could be clutching at straws to sustain my bias towards stocks, while ignoring the likes of Marc Faber, George Soros, Dennis Gartman and others, who are all growling negatively on stocks. But hell, most of these guys have been negative for so long and have been wrong.
I’m not prepared to walk out on my ‘stocks team’ just yet, so I’ll save my growling for some time in the future.
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