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It's Raining Red Arrows

Twenty-sixteen has given us a bag of gut-wrenching magic tricks. We have witnessed the disappearing act of trillions of dollars from the global markets, former Wall Street darlings turning into portfolio pariahs, and negative interest rates being pulled out of the central banks' hats. It has truly been an unforgettable performance thus far.

The bears have trampled away the benefits of diversification as financials, technology, consumer discretionary, energy, industrials, etc., have all faced an exodus of wealth. Systematic risk is howling as the capital markets are in free fall.

Like all keen observers of magic, we hunt for an explanation behind this phenomenon. If oil prices fall, shouldn't these savings boost consumer spending? Shouldn't negative interest rates pump the economy through increased loans and investment? Shouldn't we be celebrating the US unemployment rate being at its eight-year low instead of witnessing the S&P500 cratering over ten percent this year?

The slowdown of China's economy, the commodity crash, concerns over liquidity in the banking system, a spectre of a Brexit, shakiness of Asian and European markets, the Zika virus, the war in Syria, etc are all factors dragging down the markets. And they are rightfully a source of trepidation. But has the world really changed that dramatically from the last days of 2015 to the early days of 2016? Was the recovery in October 2015 just an illusion that has faded?

Should investors abandon the stock market? Hordes of money has poured into safe-haven assets causing the ten-year US Treasury bond yields to drop to 2012 levels and 10 year Gilt yields falling to historical lows. It's not the best return on investment but hey, at least, it's not negative like Japan and parts of Europe. Or should one abandon the financial markets entirely and cash out? A miniscule or even slightly negative deposit rate may be more appetizing than the daily wreckage in the capital markets.

It really depends upon one's investment horizon. Personally, I feel that markets are oversold but it is hard to pinpoint if they are bottomed out and when they will return to former glory days. Fear has superseded rationality, as company fundamentals do not seem as poor as current valuations seem to suggest. For investors with a long time horizon, I do think this is a great opportunity to go bargain shopping because with a sleight of hand, the bear can turn into a bull market.

Additional disclosure: I am currently long US and UK equities.