It Looks Like a Bear & Acts Like a Bear: It’s Probably a Bear!
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Since my last writing, the US stock market indexes have plunged through the August lows and several key support levels further below. The S&P index finished one of its worst Januarys in history, posting a loss of -6.1%. This is a foreboding warning for stocks through the remainder of 2008, as January performance is historically an indicator of things to come. It’s not official for the S&P 500, but a couple of other indices, including the Russell 2000 Small Cap Index, registered readings in bear market territory last week (-20%). This week, the sellers grew exhausted and the markets bounced off of oversold levels. The market is staging a relief rally that I believe may be short lived.
Despite this week’s rebound, this looks and acts like a bear market. Many investors have not seen it coming or have failed to identify what was making the crackling noises in the woods. Of course it’s possible that it’s not a bear, but their Aunt Betsy growling behind the bushes. But, that doesn’t explain why they’re bleeding. Better to run and ask questions later. In other words, sell the rally and reassess your strategy. It’s not too late. Bear markets seldom go straight down and the generally give fleeting opportunities to escape being mauled into oblivion. The garden variety bear markets shed 30% or more. The more ferocious bears drop 45-50% and the grandfather of all bear markets fell -78% in 1929. The point is, if this is a bear market, it is far from over.
As I have said before, the economic climate is pretty scary from my perch – a view that is not obscured by the filtered information disseminated by the media and the doubletalk of WallStreet. The housing market is weak and some experts are predicting the worst bust since the Great Depression. The credit crisis is seeping into the broader economy, corporate earnings are slowing, employment is lagging, and consumer confidence is waning – not to mention the menacing risks of a sea of credit derivatives. All along, investors and speculators have been pricing stocks for absolute perfection. The capital markets appear setup for disappointment as are the real estate markets, and the broad economy. Time will tell whether the problems in the U.S. will materially impact the global economy, but my guess is that the global economy, as dependent as it is on the American consumer, will catch cold if the U.S. economy sneezes.
These circumstances are presenting opportunities for realistic and nimble investors. Exploiting those opportunities will require investors to shed the popular conventions of the past two decades and embrace a serious paradigm shift. It is unimaginable that many people want to take a round trip to the year 2002. However, the investment industry has not done ample job of educating investors about the alternatives or even that returning to 2002 stock market levels is even plausible.
Of course, I will be keeping my eyes open for evidence of improving conditions, when we can once again become confident longer-term investors. I suspect the time will come when we can buy companies that satisfy time-tested valuation metrics instead of buying stocks on the notion that a greater fool will give us a bid in the future. Until then, Catamount will be positioning portfolios to preserve capital and profit from alternative investment strategies that tend to perform well in down trending and/or range bound markets.
