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Time to Say Goodbye to Long Bull Market?
U.S. stocks are flashing lots of bearish signs; investors aren’t panicking
HARNIK/ASSOCIATED PRESS
By BEN EISEN and DAN STRUMPF
Updated Jan. 24, 2016 8:20 p.m. ET
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Several market indicators are fueling expectations for further declines in U.S. stocks as investors grapple with the turbulence that has marked the start of the year.
Thursday and Friday brought a pause to January’s selling, pushing the S&P 500 to its first weekly gain this year. But several gauges of the stock market’s strength, such as the performance of transportation shares and the proportion of stocks down more than 20% from recent highs, are flagging.
These signals, combined with the S&P 500’s 6.7% drop so far in 2016, have reinforced Wall Street’s dour outlook as the bull market stumbles into its seventh year.
Still, the market could easily rally in coming weeks following the swift declines this year. Some investors say now is the time to buy stocks that have been bruised by a broad selloff that has pushed all but two S&P 500 sectors into the red for the year. A rebound from intraday lows Wednesday may have marked the bottom of this rout, some portfolio managers say.
The latest selloff was spurred by worries about the pace of global growth, especially in China. Even if the U.S. and global economies continue to click along without falling into recession, some investors say they are anticipating that stocks will fall into a bear market, defined as a decline of 20% or more from a previous peak.
“There is no doubt that this will be classified as a bear market,” said Doug Ramsey, chief investment officer at Leuthold Weeden Capital Management, which has $1.8 billion in assets under management in Minneapolis. “Something is going on underneath the surface.”
While the Dow Jones Industrial Average and S&P 500 are down 12% and 11%, respectively, from their records, most stocks in the S&P 500 have already fallen by more than 20% from their recent highs—a sign that many analysts say points to deeper rot. A handful of companies with large market capitalizations, such as McDonald’s Corp., AT&T Inc. and Google parent Alphabet Inc., have limited the declines in broader indexes, portfolio managers said.
Price-to-earnings ratios, a measure of how expensive stocks are, have come down, but so have profits of the S&P 500 companies, raising questions about what might propel the next upturn in share prices.
Thirty-five out of 45 major country stock indexes had fallen by 20% or more as of Friday, according to a count by Bank of America Merrill Lynch.
The U.S. could soon be next to enter bear-market territory, which would technically end the long bull market, based on the indicators watched by chart-savvy investors.
After rising for much of the last five years, the NYSE Advance/Decline Line—a measure of the proportion of shares moving higher over time—has been falling this year, according to Ned Davis Research, a sign to some that the market is losing steam. The S&P 500 is also well under its 200-day moving average, which some investors also interpret as a bearish signal.
Technical factors aren’t the only worry. Companies in the S&P 500 are expected by analysts to report a fall in fourth-quarter earnings from a year earlier. That would be the third straight quarterly decline, the first time that has happened since 2009.
Last week, Union Pacific Corp. reported a 22% drop in fourth-quarter earnings, while United Continental Holdings Inc. posted higher earnings but said it is feeling downward pressures on fares. Shares of both companies are down by double-digit percentages this year.
Optimists argue that stocks will avoid a bear market as long as the U.S. economy remains resilient. The economy is near full employment, housing construction is growing at the fastest pace since 2007 and auto sales set a record last year.
Only three of the 13 bear markets since the Great Depression have taken place in the absence of an economic recession, defined as two straight quarters of contraction, according to Bank of America Merrill Lynch. The last time it happened was 1987, when the S&P 500 fell 34% in the wake of the “Black Monday” selloff.
Wall Street’s favorite gauge of fear, the CBOE Volatility Index, hasn’t surpassed levels seen last August, when it spiked to its highest since 2011. A measure of the volatility of the VIX, known as VVIX, hasn’t surpassed levels seen last month.
“That says that people aren’t positioned for this to turn into a major explosion of volatility,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank AG.
Other markets aren’t flashing red. The difference between 10-year Treasury yields and two-year yields has remained relatively large at nearly 1.2 percentage points. When the difference gets small or becomes negative, it can signal a recession. A December junk-bond rout hasn’t spread to higher-quality companies or intensified within sectors of the market beyond energy. Gold, which is seen by many as a haven asset and often jumps when investors are worried, is up just 3.5% this year.
“There doesn’t seem to be a significant amount of panic,” said Chris Gunster, head of fixed-income portfolio management for U.S. Trust.
Yet even if the optimists say a further selloff isn’t imminent, they acknowledge that a return to the peaks of last year looks difficult, too. Stock valuations still aren’t cheap on a historical basis. Last week, the S&P 500 traded at 16.2 times the past year’s earnings, above its average of 15.7 times over the past 10 years, though down from 18 times at the end of last year.
For now, some bulls are content to buy stocks that look like bargains.
“I wouldn’t say that the market as a whole is cheap,“ said David Rosenberg, chief economist and market strategist at Toronto money manager Gluskin Sheff & Associates Inc. But “certainly there are areas of the market that are attractive.”
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