Looking at the performance of financial markets in recent months, it seems increasingly likely that the splendid Bull Market of 2009-2015 that powered US stock prices up more than 200% from the gloomy lows of March 2009 to May of last year has now seemingly gone into retirement. Replacing it, a new Bear Market, which has chopped some 11% off of stock prices since May of 2015*. Plunging commodities prices, led by collapsing energy quotes, evaporating values for coal, metals, machinery, and a variety of other commodities and finished goods, all of which are now in considerable surplus, has sucked financial markets and much of the global economy into a deflationary vortex that has opened the door for a new Bear Market which seems to be only in its early stages.
But this is not the Great Grizzly of 2008, which nearly annihilated the entire global financial system. This appears to be a milder, cyclical Bear Market typical of many previous cycles. This is not the thousand pound beast that wants to rip your head off, this is more like Yogi Bear and Boo-Boo, less dangerous, but bears nonetheless.
Yes, Yogi and Boo-Boo were cute 1950s vintage cartoon characters us older folks fondly remember, back when TV had only a few channels and William Hanna and Joseph Barberra dominated the art of the TV cartoon. Yogi was a gentleman Bear, who wore a tie and hat and saluted Ranger Smith with his obedient but somewhat manipulative dialogue of “Yes sir, Mr. Ranger Sir!” and so on. And Boo-Boo, a mild mannered, bow tie wearing mini-bear, was even less threatening. But don’t forget the Yogi Bear story line; Yogi and Boo-Boo’s mission was to steal your picnic basket. And your portfolio picnic basket is what must now be protected if we are to get to the other side of the Jellystone Park that is this cyclical Bear Market.
If Yogi and Boo-Boo have their way, this new Bear Market will subtract substantially more from stock indexes before a new Bull comes to the forefront. Many picnic baskets will be swiped from investors who look buy the dips, which works fine in Bull markets, but not in an environment like this one.
But why you might ask, is this now a Bear Market? First, the global and US economic environment has deteriorated sharply since peaking in late 2014. Our proprietary Econometric Matrix we’ve faithfully maintained since 2001 is signaling a sharply slowing economy here in the US, with some of the lowest composite readings since late 2009.
Meanwhile, the China economy, 2nd largest on Earth appears to be showing a marked deceleration from its previously strong growth rate; amounting to a big global negative. China was everyone’s big customer for everything. Energy producers Russia, Brazil and even Canada are already in recession, while Japan and Western Europe struggle to ignite some economic momentum via currency devaluation and monetary stimulus, as we seemingly circle the global deflation drain, at least for now.
Domestic corporate earnings and more importantly revenues also appear to be somewhat negative, with early indications pointing to a reduction of around 2% or more for S&P 500 earnings this year. Furthermore, looking at the relevant technical chart patterns, the news is no better, key trend lines are now pointing downward, suggesting that stock prices have lower to go before Yogi and Boo-Boo go back into hibernation.
Add to all of the above troubles is the great question mark of the US election, where extremist rhetoric both Left and Right is dominating the discourse at this point. Mix all this up and you have a powerful cocktail of negativity that could undermine global stock prices for many months to come.
So what are investors to do in an environment where Yogi and Boo-Boo are having a field day stealing investment portfolio picnic baskets with no Ranger Smith in sight? Having and acting upon a common sense Financial Plan has worked well in previous bear markets and can see you through a bear market like this one. This is where financial advisors really earn their money; by shepherding clients through negative environments, where survival, not immediate profit, is the order of the day. Once through this cyclical Bear, a new Bull market will emerge, and profit will again stuff the pockets of the prudent, patient and calm investor.
*As of February 2nd 2016, measured by the S&P500 index