The Sky Is Never Falling

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Includes: EOG, PBCT, SPY, WMT
by: Eric Parnell, CFA

Summary

Bearishness is sometimes confused with calls that the sky is falling.

The sky is never falling.

The stock market is always filled with opportunity no matter how challenging the weather.

It is a sentiment that I sometimes see when writing a bearish commentary on the U.S. stock market. The most recent example came from a reader who commented on an article that I published this Tuesday: "The sky is always falling with these guys, greed makes money off fear". I always appreciate the comments from my readers, even those that strongly disagree with my views. It is the vigorous discussion and interesting debate that comes in the comment section of the articles that makes Seeking Alpha so outstanding. And as for this comment, I felt it so worthwhile that it warranted its own article. The key point in response to this comment: The sky is never falling when it comes to investment markets.

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About Falling Skies

But aren't you a doomsayer by declaring the stock market may go down at any given point in time? To answer this question, it is worthwhile to flip the question upside down. Are we saying that everything is awesome by declaring that the stock market may go up at any given point in time? Absolutely not. If it were, then the U.S. economy should be expanding like gangbusters given the fact that stocks have hit a triple off of their post crisis lows. But it's not. In fact, it has been so sluggish and people are feeling so not awesome that we have seen an unprecedented change take place in the White House with a president-elect being ushered in with a mandate to give Washington DC a policy making enema. So just as saying the stock market is going higher does not imply that everything is awesome, so too saying that the stock market may go lower at some point in the future is not a declaration that the Apocalypse is upon us.

But what of a potential Apocalypse for stocks? Would it necessarily be such a bad thing if it came to pass? I was once challenged by a commenter that I highly respect on Seeking Alpha for the use of Apocalypse as it related to the stock market in an article from several years ago. The following was my response:

"While my inclusion of the word apocalypse was used with the intent of keeping to the references made in The Book of Revelation in the New Testament of the Bible, your point is well taken that this word in the title might be seen as a bit provocative.

As a result, I think it is worthwhile for me to take this reference a step further.

Working off of the literal translation of apocalypse to mean "revelation" or "unveiling", I believe that any such major market correction would be one that would not be destructive and terminal but instead would lead to a positive new order and return to more ethical and constructive free market behavior in financial markets. One of the themes that I have repeatedly stated in my articles for many years on SA that we would find ourselves at the dawn of a new secular bull market once a final corrective cleansing process was allowed to play out in investment markets.

Such a transformation would hopefully include a renewed focus on personal responsibility, no longer assuming undue risk with the intent of passing along losses and a recognition that true fiscal and monetary discipline instead of reckless indebtedness is the most sustainable path to long-term growth. And if it requires financial markets to endure some short-term pain and cleansing in order to at least partially arrive at any of these outcomes, it would be worth it in the end.

But given the innovations in technology and health care along with burgeoning energy sector growth and the potential for a renewed phase of manufacturing strength, I remain very bullish on the long-term outlook for the U.S. economy in the 21st century once we are finally able to emerge from the circumstances that continue to drag on the economy today."

If a stock market "Apocalypse" finally cleanse the detritus that continues to bog down the U.S. economy and brings with it the dawn of a new sustained robust growth phase much like we experienced in the 1980s and 1990s, then bring it on as far as I'm concerned. This isn't skies falling. Instead, it is weathering the necessary storm to reach the clear blue skies ahead.

But What About The Trip Through The Storm?

Of course, investors need a strategy to travel the way through any such turbulent period along the way. And some are dedicated to the stock market and nothing else. Does this mean that these stock investors are doomed to an era of pain along the way? If they cling to their buy-and-hold S&P 500 Index fund maybe. But just as the commenter astutely points out, greed makes money off of fear. And this is true regardless of whether an investor is basking in the sun of a raging bull market or battling through the throes of a bear market.

To highlight this point, let's consider the time when it felt like the sky was truly falling most during the financial crisis from July 2007 to March 2009. But it is easy to forget that this was an 18-month period of time where trading hours felt like days and days like months.

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But if we dissect this nasty bear market, we can find pockets of opportunity along the way. For example, the S&P 500 Index (NYSEARCA:SPY) enjoyed an impressive +12% rally from March 2008 to May 2008 during this difficult stretch.

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And in the depths of the cauldron that was the financial crisis, we saw stocks post a strong +26% rally from mid-November 2008 through the start of January 2009.

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Of course, capitalizing on such gains requires accurate and precise market timing that sometimes require nerves of steel to execute on, particularly when the sky is seemingly falling all around you. Even trying to pull this off, of course, is understandably not for everyone.

This is where a focus on high-quality stock selection can prove rewarding. Consider shares of Wal-Mart (NYSE:WMT) during the financial crisis. One could have been standing on the brink of the market about to melt down at the start of January 2008. If they purchased shares of high-quality Wal-Mart at the time, instead of losing money they would have actually made +2% through the market bottom in early March 2009 and would have been up as much as +35% along the way. Not too shabby in the midst of the Apocalypse.

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Or consider a good old-fashioned regional bank like Peoples United Financial (NASDAQ:PBCT). One could have been right on the brink of going over the market falls in July 2008 and purchased shares of PBCT, only to see the value of their holdings rise by as much as +20% by the time the market was bottoming eight months later. Pretty nice under stormy skies.

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Or consider the investor that is not so broader stock market focused but sees the fact that oil prices are screaming higher in early 2008. Buying shares of EOG Resources (NYSE:EOG) in January 2008 resulted in a quick +70% return over the course of just four months. Did the bottom eventually fall out on these shares? Absolutely. But if you get a +70% return on a stock over the course of four months and don't take at least some of the profits along the way, then this is a risk control problem, not a sky is falling issue.

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The Bottom Line

All of this highlights an important point. Suggesting that the stock market as measured by the S&P 500 Index may go down does not mean that the potential for upside opportunity is going down with it. That's not to say that you may not have to work harder at capturing these opportunities, but they are still there for the taking for those that are willing to work hard enough to capture them. And this can be true even for those investors that are dedicated purely to the stock market and nothing else.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I am/we are long WMT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.