What a start to the year, the worst first week in history. There isn't an investor alive that's not wondering if this isn't the other shoe to fall with a repeat of 2008. Well here is the reason why stocks are dropping and what you can expect.
First off, is this another bear market with an inevitable crash?
No. Bear markets come from recessions, and there is no recession on the horizon. GDP growth will likely be 2 - 2 1/2% this year. Not great, but not terrible. Certainly not the negative numbers you need to bring the end of this bull market. In fact, I suspect things will improve!
You must be asking, "why?", with your most curious facial expression... well, remember that $1 trillion tax cut we were going to get because of cheaper energy? VOILÀ, it just became a $2 trillion tax cut, thanks to the current oil collapse. The other great benefit is seeing the low interest rate environment, which looks to continue far longer than anyone expected. I just don't see any more rate hikes any time soon.
What this implies is that the cause of almost every recession we've had since 1945, interest rate and or energy price spikes, are not on the table.
So why are stocks getting hammered here?
It's not China, North Korea, Russia or ISIS. The fact is that US bear markets are typically only affected by domestic issues, not foreign ones, and there is definitely none of this currently at play at home.
It's two things: Oil and psychology.
Psychology: After more than 6 years of a bull market, which by the way is the 4th longest in history, it is getting tired. Old and fat bull markets act differently than young ones. They inevitably become more volatile and selective, usually with lower returns, but they still go up.
Oil: The world consumes about 92 million barrels of oil per day, or about 34 billion barrels a year. Oil was $107.50 in May 2014, which cost at the time about $3.6 trillion. With oil about $30 a barrel, you can now buy if for the bargain basement price of under $1 trillion. This means that more than $2.7 trillion has been tossed into the pockets of consumers. Me and you! This is great news for the long term but shaky for the short.
That $2.7 trillion is not chump change. The entire global financial system cannot quickly move this much money around without causing drastic disruptions. I suspect that oil will bottom in the first half of this year somewhere in the 20's or high teens. That will put some stability back into the stock market. That will also give the European and Japanese stimulus programs, aka quantitative easing, time to start working.
As I discuss above, the current pullback is a normal correction and not a new bear market, therefore investors should be taking advantage the cheaper prices and buying top growth sectors such as Cybersecurity through FireEye (NASDAQ:FEY), Palo Alto Networks (NYSE:PANW) and the PureFunds ISE Cyber Security ETF(NYSEARCA:HACK). In addition, growth investors can buy Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), which is the staples for every computer made; Intel (NASDAQ:INTC), which is getting hit and a good buy at these prices; Google (NASDAQ:GOOG) (NASDAQ:GOOGL), which has had a nice rebound but still a great time to step in as their growth potential is in the stratosphere; Netflix (NASDAQ:NFLX), which revolutionizes media delivery and will have the earnings to prove it; Facebook (NASDAQ:FB), a social media staple and is winning over the older crowd, which are the people with money; and Amazon (NASDAQ:AMZN) which practically owns the online marketplace. For a broad-based approach, you can simply buy the market ETFs like the PowerShares QQQ Trust ETF (NASDAQ:QQQ) and the SPDR S&P500 Trust ETF (NYSEARCA:SPY). The WisdomTree Europe Hedged Equity ETF (NYSEARCA:HEDJ) is the play for a European resurgence as it is long EU stocks and short the currency. If you are cautious and want to play the downside, or want some portfolio insurance, look toward the ProShares Short S&P 500 ETF (NYSEARCA:SH) or the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX)
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.