Oak Associates’ co-CIO and portfolio manager Mark Oelschlager has posted a piece on recent market volatility. Oak believes that current events (specifically: China’s economic slowdown and market rout) are not enough to throw the US economy into recession.
Of the US equity market, he writes, “The nature of a selloff can be quite informative as to its meaning or duration, and there are many signs that this correction may be ephemeral and that stocks may bounce back.” Those signs include a spike in the VIX, falling AAII bullish investor sentiment, and the high CBOE put-call ratio.
Oak Associates August 2015 Investor Letter
Dear Fellow Shareholder,
In a matter of a week the stock market has gone from historically low volatility to historically high volatility. Through mid-August this year, the S&P 500 traded in about a 6% range. That changed last week when the index declined over 3% the first four days of the week, followed by another 3% decline on Friday and 4% more on Monday. This means that large cap stocks have lost 10% of their market value over the last six trading days. The damage to the average stock has been even worse, and if we measure off their highs, the median S&P 500 stock is down 18% as of Monday. Research firm BTIG1 tells us that, excluding bear markets, there have been only three times the S&P 500 has fallen by more than this in such a short period.
What caused this rout? China is being assigned the most blame, as their economy continues to disappoint, their stock market has crashed, and the authorities have begun to devalue the yuan, which seems to have thrown the financial world order out of balance. China’s managed economy relied for many years on fixed investment (physical assets such as land and buildings), which resulted in a misallocation of resources that it is now dealing with. It now faces the decision of whether to double down on its old policies or transition to a more consumer-driven economy. Either choice may be painful for them, and whichever one they make, there will likely be lots of money thrown at the problem, as seems to be the default policy prescription around the world these days. For centuries governments have felt compelled to manage their economies so that they may better serve us in the way that we think they should. China is just the latest example of the pitfalls of this approach.
The good news is that, in our estimation, the current events are not enough to throw the US economy into recession. Things can always be different this time, but the conditions that typically precede recessions are not present. And if we are not headed into recession, the recent downturn in the market appears to be unjustified.
The nature of a selloff can be quite informative as to its meaning or duration, and there are many signs that this correction may be ephemeral and that stocks may bounce back.
- On Monday the Volatility Index (VIX), also known as the “fear index,” spiked above 50. The only time in the last 20 years that it has reached this level was in February 2009, which happened to be an excellent time to buy stocks.
- AAII bullish investor sentiment, which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months, has fallen to a level seen only a handful of times in the last 30 years. Each of those times proved to be a terrific time to buy stocks.
- The CBOE (Chicago Board Options Exchange) put-call ratio hit an all-time (20+ years) high on Monday – another excellent contrarian signal. The put-call ratio has long been viewed as an indicator of investor sentiment in the markets, as the ratio represents a proportion between all the put options and all the call options purchased on any given day.
- Selling was relatively indiscriminate on Monday, indicating that much of it was “forced” selling, likely driven by liquidation of ETFs (exchange-traded funds) and futures contracts. If the selling were truly indicative of an adjustment to the assessment of US economic prospects, we would have expected greater differentiation in Monday’s trading, rather than defensive stocks declining as much or more than non-defensive ones.
- We are starting to see research firms providing lists of stocks that are able to weather the global economic storms. This is normally what we see after the storm has passed.
As always there are no guarantees, but, in our view, these are all very positive signs. We believe that once again those that keep their cool will be rewarded in the long run. We stay fully invested, as we believe it benefits our clients over the long run.
Best regards,
Mark Oelschlager, CFA?Co-Chief Investment Officer & Portfolio Manager
1BTIG Prime Brokerage’s Research & Strategy teams provides insight into prevailing market conditions and global macro trends.
To determine if this fund is an appropriate investment for you, carefully consider the fund’s investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the fund’s prospectus, which may be obtained by calling 1-888-462-5386 or visiting our website at www.oakfunds.com. Please read it carefully before investing.
Mutual fund investing involves risk, including the possible loss of principal. The value of the Fund’s investments will vary from day to day in response to the activities of individual companies and general market and economic conditions. Fund concentration generally leads to greater price volatility.
Past performance is no guarantee of future results.
The opinions and statements are those of the author as of 8/25/2015 and are subject to change. All information is historical and not indicative of future results. This information is not a recommendation to buy or sell.
The S&P 500 Index is an unmanaged index, and its performance does not reflect management fees, transaction costs or expenses. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighed index (Stock prices times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value.?VIX is a symbol for the CBOE (Chicago Board of Options Exchange) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 Index options.
Oak Associates Funds are distributed by ALPS Distributors, Inc. ALPS Distributors, Inc. and Oak Associates Funds are separate and unaffiliated.
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