Feb 11, 201611:00 AMFinancial Perspectives
with Michael Dubis, CFP
What 'might' be driving this bear market, and what can you actually do about it
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Last week was another wild week. Over the past six to 12 months we’ve basically been in a bear market for most major equities. Perhaps you noticed.
There are a number of issues brewing in the market that “might” be driving things (it’s never just one thing):
- Valuations going into 2015 and 2016 in U.S. markets were — and may still be — high. This has been the case for a while, perhaps even going back a few years, so it shouldn’t surprise anyone that we’re experiencing a pull back. However, valuation indicators are very hard to exploit profitably in the short-term and so it’s likely not worth anchoring your portfolio strategy on this. Further, earnings seem to be losing steam and the U.S. dollar increased dramatically in 2015. So when economies are slow growing the dollar strengthens, earnings fall, and you’re trading at high multiples, your momentum naturally moves the other way in order to adjust to these changes.
- China’s economy and currency devaluation. China’s growth is slowing and its GDP numbers are not transparent, so you have a huge wildcard overseas. They are devaluing their currency because they might have to. This is a big deal simply because China influences global trade, commodity prices, and demand around the world, which influences all major capital markets.
- A dip in oil prices. This continues to be good for the pocketbook but very bad for a major sector of the U.S. and global economies. Oil is not a demand problem with the economy; in fact oil demand has picked up. There’s simply way too much supply right now and it will take time to work itself out. Furthermore, Iran is now a serious market player in oil exports and OPEC is probably no longer as impactful as it used to be. Oil pricing impacts markets more than just oil stocks; it also influences bond markets and emerging markets.
- Central banks are no longer as accommodating (0% interest rates, bond programs, etc.). During the last few years we experienced both some of the lowest volatile years on record in the markets, plus a six-year U.S. stock bull market financed by historically low rates. Investors may have gotten used to this. Don’t assume the past five to six years are reflective of markets. Central bank departure will increase volatility. Volatility is also a natural and necessary component of long-term investing.
- Investing on margin seemed to have peaked in the past six to 12 months. With the recent and fast market drop, margin calls can pour in. Margin calls are when leveraged investors must pay the debt they owe on their leveraged stock if the stock falls to levels where the stock value doesn’t properly cover the debt-to-stock ratio. So where do they get the money to pay the loan? Well, they sell the leveraged stock, which further amplifies the loss. It’s a forced trade whether the investor wants to sell or not. As an aside, investing on margin is another one of those mega-stupid things to do with your money (I wrote about others last month).
All of this is interesting, right? Sure, great coffee talk, but pretty useless in your planning. Why? Because EVERYONE already knows about this, meaning it’s already priced into the market (and there’s nothing anyone can do to change it). Markets react violently (up or down) only when new information — information the typical investor likely knows very little about — gets repriced into markets.