A rally that saw North America’s major indexes gain at least seven per cent in January has not been enough to convince market bears that pre-October stability has returned. Temporarily inflated prices, they said, are just another sign that this bear has teeth.
In December, both Nasdaq and the S&P500 briefly met the technical definition of a bear market, declining 23 and 20 per cent respectively from their peaks. Toronto’s S&P/TSX Composite Index was widely sold as well, but fell only 16.9 per cent.
Crescat Capital global macro analyst Tavi Costa said a typical bear market goes through multiple stages — usually three, with the market see-sawing in each one — before beginning its recovery.
Crescat, a Denver, Colo.-based hedge fund that has been shorting Canadian banks, has suffered losses as a result of the January rally. Costa, however, is holding firm on his investments while expecting another decline to appear in either February or March.
“I think this is just a bear market rally that we’re having,” Costa said. “Sure it hurts the portfolio … but on the long-term those (stocks that made gains) should be trading a lot lower.
“(When stocks) are down 15-20 per cent, people panic but that’s nothing. That’s just the beginning.”
The last bear market for the S&P500 was in 2011, as fear stemming from the European debt crisis and an economic slowdown in the United States weighed on stocks. Between May and October, the index lost 21 per cent, plunging to 1,074 points from 1,370. Fourteen days later, it bounced back 19 per cent.
The rally was short-lived and by late November, the index had dipped another 10 per cent. After one final bounce and retreat, it found stability in December.
The same pattern can be found in the S&P500’s performance in the bear market formed during the financial crisis in 2008 and 2009.
We think it is better to hop off now and rest up for the next rodeo.
Michael Wilson, Morgan Stanley
Costa isn’t alone in doubting the latest market swing. Morgan Stanley U.S. equity strategist Michael Wilson sustained his negative outlook on the markets throughout January, going as far as to call for an earnings recession — that being two straight quarters of negative earnings. In mid-January, he warned his clients in a note that he’s expecting a retest of December lows and investors should consider selling once the S&P500 index reached 2,600 to 2,650 points.
The index continued to rise and closed just above the mark on Jan. 25, but still Wilson was not convinced. On Jan. 28, he wrote another note encouraging investors to let go of the bulls due to some mixed early signals from earnings season and skepticism over GDP growth.
Investors, he said, shouldn’t forget that bulls are “dangerous animals.”
“We’ve gotten close enough on a bull that is becoming increasingly dangerous and we struggle to see the upside in hanging on just to see how long we can,” he wrote. “We think it is better to hop off now and rest up for the next rodeo.”
Most investors are already wondering when — not if — the market is going to undergo another downturn, according to BMO Capital Markets chief strategist Brian Belski. It’s this mindset, he said, that has led the market toward becoming “directionless” and without perspective.
“It’s kind of like (investors) are dating, but not ready to commit,” he said. “Nobody has any perspective right now because the market is trading scared.”