Global Stock Index In Bear Market – What To Do Now by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 16, 2016
IN THIS ISSUE:
Paul J. Isaac's Arbiter Partners returned -19.3% in the third quarter of 2021, according to a copy of the hedge fund's quarterly investor correspondence, which ValueWalk has been able to review. Following this performance, the fund's return sits at -1.6% for the year to the end of September. In comparison, the S&P 500 returned 15.9%, Read More
- Global Stock Price Index Loss Exceeds 20% – Bear Market
- US Stocks Approaching Bear Market, But Not There Yet
- Have Global Stocks Overreacted, or More Pain to Follow?
- Time to Start Rebuilding Equity Exposure – Here’s How
- Justice Antonin Scalia – Conservative Champion, RIP
The plunge in global equity prices that has accelerated this year continued last week. Investors around the world are worried and as usual, many are bailing out of their buy-and-hold strategies. This is nothing new, unfortunately.
Many global equity markets are now down over 20% and are officially in bear market territory. Last week, the MCSI All-Country World Index closed down more than 20% from the peak last May. Fortunately, the major US stock indexes are not there yet.
The question is whether the global equity markets have reacted too negatively and will rebound in line with the US markets? Or will the US equity markets continue to decline into bear market territory?
The good news is that an interesting new study from Hulbert Financial Digest suggests that a powerful new rally in stocks may be just around the corner. I will discuss that study as we go along today.
You may recall I recommended last March and April that investors reduce “long-only” (buy-and-hold) equity exposure by 50%. Today, I am recommending that investors begin to rebuild that exposure back to normal levels in the coming weeks, and I will give you specific recommendations on how to do that.
Don’t forget that we have our next live webinar with Niemann Capital Management this Thursday at 2:00 CST. If you have ever considered doing business with Halbert Wealth Management, you should make plans to attend this webinar with one of the most successful money managers we have ever recommended. Register today for this webinar.
Global Stock Price Index Loss Exceeds 20% – Bear Market
The months-long sharp decline in global equities that started with a selloff in energy became a full-blown bear market last week as a further rout in bank shares extended losses past 20% in the broadest worldwide stock index.
The MSCI All-Country World Index slipped 1.3% last Thursday, pushing its decline since May to over 20%, which many agree means that we have entered a new bear market. It marked the biggest retreat from equity risk since Europe’s sovereign debt crisis in 2011. Every industry has fallen since last year’s record high with decreases exceeding 25% in global financial stocks and 30% or more in energy and most commodities.
Selling from Tokyo to Frankfurt to New York and Brazil (Ibovspa in chart below) is torpedoing one of the biggest expansions in share prices of the last century, including the US where the Nasdaq Composite Index has fallen 18% since July, and the Standard & Poor’s 500 Index is down almost 14% from its peak on May 20 as of last Thursday’s low.
Investors around the world are running for cover amid concern that the collapse in oil prices will destabilize credit markets, especially among energy concerns, and saddle banks with huge losses. Some fear that we may be entering a new financial crisis.
Only once in seven years have global stocks teetered as precariously as they are now. The MSCI Index fell more than 24% between May and October of 2011 as Europe’s sovereign debt crisis raged and the S&P 500 ratings agency stripped the US of its AAA credit rating. The latest decline trims the major advance from March 2009 to its height last May, which added about $47 trillion to equity values globally.
Equities markets have been buffeted by everything from China’s slowdown to the selloff in oil and rising US interest rates, sending them to the worst start to a year on record. The rout in the oil industry is rippling through financial markets amid growing signs that credit quality is worsening. Meanwhile US bonds are now indicating the slowest inflation since May 2009 as investors pile into safe haven assets.
In a departure from past bouts of global weakness, global markets this year are getting little help from the US. The world’s biggest economy was sluggish enough to keep Janet Yellen’s Fed from hiking rates until December, and now corporate earnings are eroding.
US Stocks Approaching Bear Market, But Not There Yet
US stocks extended their slide last week as the Dow Jones Industrial Average plunged more than 250 points as shares of financial and raw material companies lost at least 2.2%. Comments by Fed Chair Janet Yellen that market turbulence could weigh on the outlook for the economy – and delay further rate hikes – didn’t calm investors as the S&P 500 plunged as much as 2.3% during Yellen’s testimony to Congress last week.
With the US 4Q earnings season more than halfway done, just 52% of companies in the S&P 500 reported profit growth in the final three months of last year. While energy companies and materials shares have led the decline, all but three sectors reported shrinking profits. Analysts estimate that earnings at companies in the S&P 500 fell 4.5% on average in the 4Q, and could drop more than 6% in the current period.
Still, equity indexes in the US have held up compared with other developed markets. The S&P 500 has lost about 9% in 2016, compared with declines of at least 18% in German stocks and the Euro Stoxx 50 Index. In Asia, the Shanghai Composite Index is down 22% on the year and Hong Kong’s Hang Seng Index has erased over 15% of its value.
While energy and materials shares have led equities downward with declines of at least 31%, pain has been felt everywhere. All 10 primary groups in the MSCI All-Country Index have declined since the Index reached a new high in May 2015, with financial companies, consumer discretionary and tech shares adding to losses in 2016.
Have Global Stocks Overreacted, or More Pain to Follow?
Investors around the world are wondering if global equity indexes have overreacted on the downside, in which case a strong rebound is overdue, or if this is truly a bear market with much more pain still to come.
When stocks are trending higher, financial analysts tend to predict that share prices will continue to make new highs. When equities are trending lower, as is the case right now, the opposite is true – most analysts don’t think we’ve seen the bottom yet.
So who is correct? No one knows for sure but financial writer Mark Hulbert offered some very interesting analysis over the weekend. With always interesting commentaries, Mark is the editor of the Hulbert Financial Digest and a senior columnist for MarketWatch.
In his latest column, Mark looked at how likely it is that the US stock market will rebound strongly from the recent plunge in prices. In order to answer that question, Mark went back in history to study similar declines over similar periods in the past. Specifically, Mark noted that the Dow has declined significantly over the last 29 trading sessions since December 29. Over that period, the Dow declined 11%.
So Hulbert went back in history to look at all similar losses over that same 29 trading-day period going back to the late 1800s when the Dow was first created. What he found is summarized in the following table.
What Hulbert concludes from the data is that: “The U.S. stock market over the next six months is more likely to be notably higher than it is to drop further. I admit that this doesn’t seem realistic, given how terribly the market has been performing…
But a likely rally is what emerged when I studied all occasions over the last 120 years in which the stock market tumbled as precipitously as it has since late December. At a minimum, therefore, you should be just as prepared for higher stock prices as for lower ones.”
Hulbert summarizes that drops of 11% or greater in just 29 trading sessions are rare enough and painful enough to lead many, if not most, shorter-term investors to throw in the towel. That in turn sets up the sentiment preconditions for a powerful rally – even if the big drop occurs within a longer-term secular bear market. He continues:
“This discussion also sheds light on bear market behavior in general: Bear markets are better characterized as a death by a thousand cuts than a fatal stabbing. Each of those thousand cuts is insufficient to lead to the thorough-going pessimism and despair that are the sentiment hallmark of a major bottom.
The stock market’s plunge since late December is anything but. From this point perspective, therefore, the market’s recent decline doesn’t seem like the beginning of a major bear market. That isn’t to say that the last six weeks haven’t been painful. It instead is to acknowledge that pain, for that is precisely the point.”
Conclusions: Whenever analysts go back and study the historical data, they come up with averages and probabilities. Averages and probabilities are by no means certainties. What Hulbert is simply pointing out is that over 120+ years, the stock market has rebounded strongly after 29 days of sharp losses more often than it continued to plunge.
Does it mean it will happen again this time around? There’s no way to know.
Time to Start Rebuilding Equity Exposure – Here’s How
Back in March and April of last year, I recommended that readers who were in “long-only” (buy-and-hold) equity strategies reduce exposure by 50%. I was worried about a host of concerns that I feared could send the US equity markets sharply lower. As you can see in the Dow chart above, that is exactly what happened.
The Dow peaked above 18,400 in June and plunged to near 15,400 by late August. From there, it recovered to near 18,000 by November where it failed to make a new high, and then plunged again to near where we are today.
It has been a scary ride that I hope some of you avoided. Candidly, I have no idea how many of my readers took my advice last spring. But for those who did, I now recommend starting to rebuild your usual equity exposure.
Obviously, it is impossible to know if the current pullback is over. It may not be. Therefore, you may want to rebuild that equity exposure in stages. There are two ways I have suggested in recent weeks for doing so.
First, if you have $200,000 or more to invest, I strongly recommend that you look at our LEGACY CORE EQUITY PORTFOLIO right now. This strategy combines two of our most successful equity managers. One invests in carefully-selected “value” stocks; the other is a “sector-rotation” strategy based on momentum, which can move to cash in declining markets. Click on the link above for more information.
Second, if you have less than $200,000 to invest, I believe that right now is an excellent time to consider investing with Niemann Capital Management’s “Risk Managed Program.” The stock market has experienced a serious pullback, which NCM has largely avoided. The minimum to invest is only $50,000 and accounts are held at Fidelity Investments. It doesn’t get much simpler than that.
If you have ever considered doing business with Halbert Wealth Management, this is a great way to get started in my opinion. CLICK HERE to see NCM’s Risk Managed actual performance, net of all fees, going back almost two decades. Maybe now is the time to turn over a part of your portfolio to a professional like Niemann to better manage the risks of being in the market.
Be sure to join us this Thursday for our latest live webinar with Niemann on February 18 at 2:00 CST. CLICK HERE to register for the webinar. As always, past performance is no guarantee of future results.
Justice Antonin Scalia – Conservative Champion, RIP
My heart was greatly saddened to learn that Justice Scalia unexpectedly passed away on Saturday. Justice Scalia has been my favorite member of the Supreme Court for many years. While sometimes controversial, brash and outspoken, Justice Scalia single-handedly transformed the High Court with his “originalist” beliefs and opinions. He will be sorely missed.
The question now is, how to replace a legend like Justice Scalia? President Obama vowed to nominate a successor, as he is allowed to do by the Constitution. Yet the Senate must approve the nominee, and few believe this Senate will approve anyone Obama nominates. Republicans say the Scalia vacancy should be filled by the next president in 2017. I agree.
Many feel that Justice Scalia should be replaced by another conservative, but that’s not how politics work when it comes to such matters. I expect President Obama will nominate a left-wing progressive judge to fill the vacancy, knowing full-well that the current Senate would never confirm such a nominee.
I also expect Obama to make this Supreme Court battle the centerpiece of the presidential debate in the weeks and months ahead. I fully expect him to campaign for his nominee and to urge Americans to vote for the Democrat presidential nominee (presumably Hillary).
It is very sad that Justice Scalia’s death now gives President Obama a new opportunity to push his ideological agenda right up until the end, in his quest to flip the High Court from generally 5-4 conservative to 5-4 liberal. This is why we need a Republican to win in November in order to stop him.
Very best regards,
Gary D. Halbert