As global portfolio managers, we have observed the following phases for long-term systemic downward (bear) markets.
The first phase is the recognition by investors that long-term fundamentals will not support growth with the result that the markets sell-off.
In many cases there is an initial sharp decline in a specific industry: Tech in 2000, Financials in 2008, Energy in 2016.
In these cases, the crisis appears to be industry-specific in the early stages. It is only later that the contagious effects impact the rest of the economy.
Once investors recognize that the decline of a major sector of the market will have a spillover effect, the parade begins and the entire market begins to correct.
Even industries that were perceived to be truly insulated, such as staple goods, ultimately feel the effects of consumer uncertainty and cost cutting.
As fear heightens, investors begin to sell indiscriminately with fundamentals, both good and bad, being ignored.
After wholesale liquidation occurs, investors begin to reassess whether values have fallen too far, too fast. Companies with good fundamentals begin to attract investor capital while bubble stocks flatline and have their values reset.
The wait for bubble stocks to regain lost value can be a decade long exercise and may involve names that are at the top of their industries. For example, Microsoft and Goldman Sachs still trade below their pre-bubble highs from 1999 and 2007, respectively.
Thus great companies are not always good investments.
The beginning of the recovery is more difficult to assess than any other phase in our view. Green shoots are hard to see and many positive signs turn out to be false starts, as investors fear a relapse.
In 2009, many shrewd investors understood the historic impact of the massive stimulus that the Federal Reserve injected into the system and the slashing of interest rates as backstops for the equities markets. They further understood that the lowering of interest rates to essentially zero would cause bond and savings investors to shift to riskier assets, such as dividend paying stocks, corporate bonds, REITs, etc.
Unfortunately, the Fed no longer has these tools and the market's confidence at their disposal, and the artificial stimulus that was applied in 2009 may have simply prolonged a more natural cleansing of the market.
Our concerns are as follows:
- The Fed is out of Bullets
- Following the subprime crisis of 2008, the natural clearing process never occurred as the economy and companies were given lifelines.
- China intends to support growth with a systematic devaluation of their currency to reinvigorate their manufacturing sector trying to augment their switch to a consumer driven economy.
- The world is awash with low cost labor alternatives as evidenced by Vietnam's 6.5% YOY growth in 2015, keeping developed country wage growth in check.
- Short-Term rallies will abound as traders rule the market causing investors to believe that they may be missing a buying opportunity. These head fake rallies or dead cat bounces are very dangerous as they are driven by short-term traders looking for quick profits; these come at the expense of lesser informed investors.
The preceding represents our views as portfolio managers who buy, sell, and short securities across global markets, and oversee funds for investors, charitable entities, universities, and retirees.
The preceding represents the views and opinions of The Stanley-Laman Group, Ltd., a Registered Investment Advisor, and is not intended to be investment advice suitable for all investment objectives. Investment strategies involve the risk of loss of principal. Investors are advised to consult with qualified investment professionals relative to their individual circumstance and objectives.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.