04 Nov Is this the Bottom of the Stock Market Fall?

This is the most frequently asked question I get when the markets decline sharply, or around that magical 10% level – or what is commonly referred to as a “Correction”.

Memories of the big stock market crashes such as the Global Financial Crisis (GFC) in 2007/08, the 2000 Tech Bubble, 1997 Asian Currency Crisis, Black Monday 1987, and last but not least, the Great Depression of 1929, keep market participants in the grip of fear. Especially when there is a ‘little hiccup’.

“Every major market crash has to start somewhere!”

S&P500 2018 (Year to Date)

See, every major market crash has to start somewhere. A 50% crash started out as a 10% Correction, gathering momentum because investor fear triggered selling activity and economic or fundamental data didn’t provide enough confidence for buyers to accumulate as prices dropped.

So let’s take a look at the for’s and against’s for whether or not the current market activity is the bottom of this correction, or if there is more to come.

For: This is the bottom of the market!

• A 10% decline is a Correction. In fact, this is almost identical to the movement that formed in Jan/Feb earlier this year (see attached image). Albeit the markets were more ‘overbought’ (according to the 50-day simple moving average), in Jan/Feb than they were in October.
• Economics remain healthy:
  • Long-term low unemployment
  • Low Interest Rates
  • Controlled Inflation rate
  • Reasonable GDP growth rate (compared to other leading Developed nations)
• Earnings reports are mostly beating expectations, despite some of the major companies missing. According to Streetinsider.com, so far we have seen 970 companies beat expectations, and 319 miss for a 75% hit rate (to date)
• Technical analysts will note the leading indices have retraced to low points that had formed earlier in the year. Referred to as support levels, the expectation is that investors/traders perceived these levels to be good buy/accumulation prices, and are likely to perceive this again.
• Panic selling has not been evident in broader market movements. This usually triggers a mass of selling pressure, which drives prices down quickly and with strong volumes
• Every market crash needs a reason. A catalyst. Something to trigger a change that shifts the dynamics.
• US Mid-term elections have investors sitting on the sidelines until we have an outcome

Against: There is more for this market to fall!

• IMF lowered global output for 2019. So where will the economic growth come from?
• Trade wars starting to take affect on China’s economy, which is likely to respond in kind.
• European economics is showing signs of slowing down, with stalwart Germany facing its own political changing climate.
• Emerging markets have been beaten down in recent years, showing very little hope for growth.
• Divergence between large cap stocks (represented by the leading indices such as the Dow Jones Industrial Average and S&P500) which are rising, compared to small cap speculative stocks (represented by the Russell 2000 for example). This suggests investors are not willing to hold speculative positions, and are adjusting towards lower risk investments.
• October (September) has historically been the worst performing month in history, and has been the catalyst for when all the major market crashes have occurred!

Summary

I’ve never been one to panic in the markets.

Fact is I’ve been through enough Corrections, Crashes and moments of Uncertainty to know whatever the outcome, the management approach I adopt to portfolio and individual positions will survive the hardest of times.

Many of my clients and readers do not have that same level of confidence, however. I understand this, because I had to start somewhere myself. Cutting my teeth with the Tech Bubble in 2000.

But I am not in the game of prediction. We can form opinions on what the markets could do, providing evidence for why. None of us know exactly what will happen.

I don’t want to sound like the “two handed economist” … on the one hand the markets could do this, but on the other, they could do that!

So based on the current data, whilst I see potential that the markets could create a larger movement than a 10% correction, there is no evidence right now that this current decline will result in a broader crash.

Leading US indices have declined to 2018 low levels. There’s uncertainty around Mid-term elections, but earnings results are mostly positive despite some of the leading companies missing.

My approach will be to evaluate the markets holding current levels, building confidence again for a potential recovery. I couldn’t say if that will result in new long-term highs or if we become range bound for a while.

But my strategy will be to accumulate/enter long around these levels. If we breach these 2018 lows, I will evaluate and reconsider. But for now, a little patience could offer some great prices in an economy that hasn’t provided evidence of declining and a market that hasn’t shown panic.