Category: forecasts

6 reasons why an equity bear market has begun

Market leadership

Out of 35 country stock markets, just four are up this year, led by the Norway and the U.S.  Thirteen are down by double digits.  China and India, which account for 18% of the world’s GDP, are -15.4% and -20.7% respectively.  Even within the U.S., fewer and fewer stocks are participating.  According to Delta Investment Management, just 50.8% of 3,600 stocks are in uptrends, even though the S&P 500 is up 13.1% over the past 12 months and just 1.5% below its all-time high.

 

Investor sentiment

Sentiment has rebounded from the whiff of pessimism created by the February-March selloff to levels of extreme bullishness.  Sampling our 10 favorite sentiment indicators, the median reading is in the 90th percentile of bullishness.

 

Bullishness Percentiles

Indicator 10-YearBearish

Extreme

10-YearBullish

Extreme

Recent

Value

Bullishness

Percentile

Date ofRecent

Value

S&P 500 2901.61 10/4/18
VIX 59.93 9.14 12.12 85th 9/28/18
3-Month VIX 48.90 13.00 15.75 87th 9/28/18
Investors IntelligenceBulls – Bears -26.4% +54.0% +42.3% 92nd 9/21/18
Consensus, Inc.Bulls 18% 78% 69% 68th 9/21/18
AAII Cash Allocation 44.8% 13.0% 16.0% 84th 9/30/18
NAAIM Equity Exposure Index (Median) 0% +100.0% +82.5% 59th 10/3/18
MMF / Mutual Fund + ETF Assets 41.0% 12.2% 12.4% 99th 8/31/18
Mutual FundCash Levels 4.1% 2.9% 3.0% 94th 8/31/18
Rydex Bear Fund Assets / Total Assets 59.2% 3.4% 4.8% 96th 10/3/18
Rydex MMF / Bull +Sector Fund Assets 98.6% 6.8% 7.1% 93rd 10/3/18

Sources: Investors Intelligence, Consensus, Inc., American Association of Individual Investors, National Association of Active Investment Managers, Investment Company Institute, Guggenheim Investments, Bearing Asset Management

 

Interest rates

Interest costs on the $21 trillion federal debt have doubled since the 2016 election as we move closer to trillion dollar budget deficits.  The 30-year Treasury bond yields 3.38%, a 4-year high.  The 10-year yields 3.23%, its highest level since 2011.  Cash (using 2-year T-bills as a proxy) is the most competitive with stocks since late 2007.

 

Liquidity

The world’s central banks have been cutting back on quantitative easing.  The Federal Reserve has contracted its balance sheet 5.0% the past 12 months.  Combined, the Fed, Bank of Japan and ECB will no longer be adding liquidity by the end of the year.

 

Positioning

Stocks are priced for perfection and investors are positioned as if the record 10-year bull market will go on indefinitely.  Retail investors cash levels, from TD Ameritrade to Schwab, are at all-time lows.

 

Economy

Since 2009 total worldwide debt increased by over 40%.  Within the U.S., since the end of 2008 student loan debt is up 127%, auto loan debt 57%, corporate debt 76%, and public debt 98%.  Margin debt has more than tripled.  There is currently $8 trillion in dollar-denominated debt outside the U.S. and currencies in 20 countries have declined by double digits against the U.S. dollar.  In other words, their interest costs are rising.  We’re already seeing cracks appear in countries like Argentina, Turkey and South Africa.  To this fragile situation, President Trump is risking a trade war.  Never a good idea, but the timing couldn’t be worse…

 

7th Reason

It’s October…

Predictions for 2017

Those who have knowledge don’t predict. Those who predict don’t have knowledge.” ~ Lao Tzu, 6th century BC poet and father of Taoism

It appears Lao Tzu anticipated the accuracy of our 2016 predictions twenty seven centuries ago.  While we got a few right (rebound in gold mining and Brazilian stocks, the demise of Valeant Pharmaceuticals, and 50/50 chance Trump would be the next president), we got plenty wrong, most notably a 25% bear market in stocks.

Bloodied, but unbowed, here is our short list for 2017:

1) The Trump honeymoon is short-lived, doomed by absurdly high expectations, faulty economics and political expediency.

– positives: Sanctions against Russia end as the Cold War thaws.  Regulations are cut, especially in the energy sector.  U.S. corporate tax rate is cut to 25%, bringing it more in line globally.

– negatives: Obamacare is not repealed, but instead replaced with a watered down version, dubbed “Trump Care.”  The debt ceiling is raised in March and federal spending continues to grow unchecked, even adjusted for inflation and population growth.  Trade tensions increase.  Common Core is not repealed.

2) Global economy officially enters recession.  China, the Euro Zone and U.S. all join the fray.

3) Global backlash against the political establishment continues.  Populist parties do especially well in Europe.  French, German and Italian bonds suffer.  Heading into 2018, a breakup of the EU looks like a serious possibility.

4) Most global equity markets enter bear market territory.  The S&P 500 ends the year down over 20% (below 1800).

– worst performers: financials (global banks, investment banks, auto finance, bond insurers), REITs (retail and office), technology, industrials, Chinese financials

– best performers: discount retailing (Wal-Mart, Dollar Tree), food-related, fertilizer, genomic sequencing (Illumina), cancer drugs (Bristol Myers)

5) Inflation begins to become a concern.  Gold and gold mining stocks do very well.

6) U.S. dollar peaks, losing ground to the Swiss franc, euro, British pound and Japanese yen.

7) China cracks widen.  Bonds extend losses.  Equities fall over 20%.  Yuan experiences at least one official devaluation, even though the Chinese sell over $200 billion in U.S. Treasuries to shore up their currency.  Trump cries fowl, labeling China a “currency manipulator.”

8) Official U.S. deficit for fiscal year ended 6/30/17 exceeds $600 billion.  Talk of future trillion dollar deficits becomes more commonplace.

9) Active investing makes a comeback.  BlackRock is a notable underperformer.

10) Global free market reforms are a mixed bag.  Brazil makes progress, India regresses.

Bring in the clowns

On May 3rd the DJIA hit 15,000 for the first time.  Right on cue, Ralph “Make ’em Poorer” Acampora predicted Dow 20,000 by 2017 on CNBC in an interview with Maria Bartiromo.  She heaped praise on Acampora’s recent bullish prognostications while conveniently hitting the delete key on his past, which included this blooper from the top of the credit bubble on July 18, 2007 (also on CNBC):

“I’m predicting Dow 21,000 by 2011. It’s only 40% from here [actually 51%, but who’s counting]. It’s a lay-up.” When asked about recent credit jitters, he responded, “Bad news is good news; never fight the tape.”

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