Despite the stock market’s persistent volatility, peppered with abrupt deep declines that has all but unhinged it from the high levels in May, the notion that a bear market has begun is fanciful wishful thinking.
Although that’s hard to believe after the brutal beating the market has gone through, the bull market is hale and hearty – and far from over. The resiliency the market has shown is a clear indication of its continued underlying strength.
True, the market went into a correction mode in August and, not surprisingly, scared the bejesus out of the average investor. But bear markets emerge only when recessions show its unwanted head, and that just isn’t in the cards at this particular time.
“We are skeptical that a recession, a bear market or a 1997-98-like debt crisis is near,” asserts Lisa Shalett, head of investment and portfolio strategist at Morgan Stanley Wealth Management. Technical indicators don’t show cycle-ending stress, she argues.
Apprising clients of how she gauges the market’s volatility, Shalett notes that a confluence of accelerating weakness in commodities, China’s slowing growth and the surprise de-pegging of its currency catalyzed the correction. The rebalancing of cash liquidity and concern over growth prospects, she points out, are helping drive the volatility.
But there are ample reasons to be optimistic. Improved valuations plus extreme sentiment readings and potential for policy catalysts, especially from China, “keep us patient and constructive,” says Shalett. Watch for technical factors to signal a bottom, she advises. She reminds investors that corrections aren’t V-shaped, nor are they over in three days.
So, investors should “consider shopping among high-quality victims of indiscriminate selling – U.S. stocks and investment grade and high yield credit.” She advises clients to use hedged strategies and managed futures to reduce volatility.
No need to be overly concerned about the market's roller-coaster behavior. U.S. equities still offer attractive upside potential, particularly relative to bonds, says Shalette. “We believe the U.S. and global economies continue to heal, making recession neither imminent nor likely in 2015 or 2016.”
For investors who worry that the S&P 500’s decline of more than 10% in late August may be signaling that a recession is imminent, the market’s history says otherwise, according to Sam Stovall, chief equity strategist at S&P Capital IQ. While all recessions were preceded by corrections, “there were nearly three times the number of 10%+ declines than there were recessions since 1948,” he notes.
So while all recessions since 1948 were preceded by market declines of more than 10%, not all of those declines proved to be bear markets, says Stovall. In all, the number of 10% or more declines (31) exceeded recession counts (11) by a near 3-to-1 margin, he says.
That, Stovall recalls, led to the amusingly accurate observation by MIT economics professor and Nobel Laureate Paul Samuelson that ”Wall Street indexes predicted nine of out of the last five recessions.”
Another investor worry is whether the Federal Reserve will raise interest rates when it meets next week. So more market volatility is expected until the Fed makes its decision. Wall Street has been torturing itself over this question, one that they can't seem to fathom as to the impact of whatever decision the Fed makes.
Stovall’s advice on how to play the Fed’s next move: Look at further declines as opportunities to add to equity positions, rather than lightening portfolio exposure. S&P Capital IQ equity analysts, he notes, currently have 8% of their stock coverage universe ranked as a strong buy.
S&P Capital IQ ranks as “overweight” the health care and telecom services sectors, and rates as “market weight” the information technology, consumer discretionary, consumer staples, financials, and industrial sectors. The groups it currently ranks as underweight: Energy, utilities, and materials.
One widely respected Wall Street money manager who remains stoutly bullish is Leon Cooperman, founder and CEO of Omega Advisors, who blames the market’s steep decline and volatility on the esoteric and computer-programmed trading strategies by hedge funds and flash-traders. In his recent note to clients, Cooperman said he doesn’t see any of the inflationary and financial stresses that led to recessions in the past.
“If the U.S. equity bull market is over, it will be the oddest ending to a bull market in the postwar period,” he says. “We believe that the bulk of U.S. equity market damage has been done.” As a result, Cooperman predicts that U.S. stocks will end the year higher, regardless of the market’s persistent volatility.
On Aug. 24, when the market started its surprisingly devastating downward spin, and when the Dow lost more than 1,000 points within an hour’s time, I wrote in this space that the market had turned into something like a “candy store for long-term investors.”
I noted that widely held stocks, among them Apple (AAPL), Facebook (FB), JP Morgan Chase (JPM), Amazon (AMZN) and Starbucks (SBUX), to name just a few of the pummeled large-cap stocks, were being unjustifiably dumped and priced at fire-sale prices.
Apple, which traded as high as $132 a share on July 30, 2015, was pounded down to as low as $92 on Aug. 24. But by Friday, Sept. 11, it had snapped back, closing at $114.23 Facebook, which traded at $98 on Aug. 21, crashed to as low as $82 on Aug. 24. But by Sept. 11, the stock had rebounded and closed at $92.05.
JP Morgan tumbled to $50 on Aug. 24, from $69 on July 16, but it recovered by Sept. 11, to $62.56. Amazon, which traded as high as $536 on July 30, dropped to $463, but climbed back up to $529.44 by Sept. 11. And Starbucks was flying high at $59.02 on Aug. 5, but got clobbered down to $42.05 on Aug. 24. By Sept. 11, it smartly bounced back, to $56.53 a share.
Corrections or even bear markets are in many ways designed to be great opportunities for the intrepid investor.
