The third quarter ended with all the major indices in the red for 2015, with small cap stocks as well as the industrials delivering the weakest performances… so the big question is are bear markets ahead?
Every sector also ended the quarter in the red for the year, with the one exception of Consumer Discretionary, which barely eked out a wee little positive return, (technical term there) while the Energy sector and Materials took a major pounding.
So let’s take a bigger step back and see where the markets are from a longer-term perspective. The chart below shows the inflation-adjusted S&P 500 index in constant August 2015 dollars. We believe it is rather telling to see that prior to the current bull run, the S&P 500 peaked in 2000. The 2007 peak did not quite reach as high as the 2000 peak and had a lower trough. The most recent bull run reached just slightly higher than the 2000 peak, but has broken its longer-term upward trend and now appears to be on a downtrend.
The big question is are we now in an interim dip, that will provide a great buying opportunity along a continued upward trend, or are we facing the beginnings of a beat market? Hate to say it, but the data is giving me a serious craving for some honey!
- The typical bear pattern is first a loss of breadth, which we’ve experienced for about 18 months. Check…
- Next comes loss of leadership. We’ve seen Walt Disney (DIS), which has been on a tear since late 2011 break significantly out of its long-term trend. Sectors like biotech, as illustrated by iShares NASDAQ Biotechnology ETF (IBB) and media, such as Global X Social Media Index ETF (SOCL) have also experienced major directional shifts. Check, check.
- During the first stage of a bear market, we often see rallies that simply cannot hold. We experienced a painful plunge down to a bottom on August 24th with the following rally unable to bring us back up to the previous highs, followed by another collapse on September 16th. Check, check, check!
- Finally, after having the markets trade in the tightest trading band in history for the first half of the year, we now have triple digit drops in the Dow Jones Industrial average becoming more frequent. Check, check, check, check!
That’s the market movement, but what about fundamentals? Over the last six months, only about 37% of publicly traded companies have increased their revenue forecasts, which is the smallest percentage since 2009 and almost as bad as during the 2001 bust. Median sales growth estimates for the next 12 months are about 4% versus the longer-term norm of 7%. Meanwhile earnings revisions are back down at historically low levels not seen since the financial crisis.
With weaker earnings moving forward, a continued bull market will need investors that are comfortable with expanding P/E ratios, but that would require that investors be risk-seeking and there isn’t much evidence of that when we look at how much money has been pulled out of emerging market stocks and bonds. Only time will tell if that bear is coming out of hibernation to stay a while, but for now, I’m getting increasingly defensive as I perceive the potential risks for most equities as being disproportionately nail-biting versus rewards.