Bear Sighting – Time to Panic?

The global stock markets do seem to be in panic mode right now.  In the first two weeks of 2016, the U.S. S&P 500 index was down 8% on the year, close to correction territory (a 10% decline), with some predicting a bear market (a 20% decline).  

We’ve also been hearing a widely publicized, rather alarming prediction from Royal Bank of Scotland analyst Andrew Roberts, saying that the global markets “look similar to 2008.”  Mr. Roberts is also predicting that technology and automation will wipe out half of all jobs in the developed world.  If you listen closely out the window, you can almost hear traders shouting, “Sell!  Head for the exits!”

When you’re in the middle of so much panic, when people are stampeding in all directions, it’s hard to realize there might be no actual fire in the theater.  Yes, oil prices are down around $30 a barrel, and could go lower, which is not exactly terrific news for oil companies and oil services concerns—particularly those who have invested in fracking production.  But cheaper energy IS good news for manufacturers and consumers, which is sometimes forgotten in the gloomy forecasts.  Bad news for oil could also mean some good news for alternative energy and the environment, especially given that energy demand is not likely to plummet indefinitely.  There is plenty of angst about China.  Chinese stocks and the Chinese economy are showing more signs of weakness, and this is affecting expected energy demand.

So what about the RBS analyst who is yelling “Fire!” in the crowded theater?  A closer look at Mr. Roberts’ track record shows that he has been predicting disaster, with some regularity, for the past six years—rather incorrectly, as it turns out.  In June 2010, when the markets were embarking on a remarkable five-year boom, he wrote, “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy.  Think the unthinkable,” he added, ominously. (“The unthinkable,” whatever that meant, never happened.)

Again, in July 2012, his analyst report read, in part: “People talk about recovery, but to me we are in a much worse shape than the Great Depression.”  Wow!  Wasn’t it scary to have lived through, well, a 3.2% economic growth rate in the U.S. the following year?  What Great Depression was he talking about?  Taking his advice in the past would have put you on the sidelines for some of the nicest gains in recent stock market history.  And it’s interesting to note that one thing Mr. Roberts did NOT predict was the 2008 market meltdown.

As we stated in last week’s blog, the most simple and best explanation is that this recent drawdown is entirely normal.  Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years.  One in five years (22.6%) have experienced drawdowns of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.  

Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are clearly experiencing one of those periods now.  Whether this will be one of those 5-10% years or a 20% year, only time will tell.  But in the past, every one of those drawdowns eventually ended with an even greater upturn and markets testing new record highs.  

So stay in your seats. Don’t join the panic. Enjoy the movie instead.