During the recently concluded bull market, the fear of missing out encouraged investors to routinely chase stocks. From early 2009 until some point in 2014 (and only very recently for outliers) that greedy impulse was rewarded. When stock prices are in an uptrend and the conditions for them to go higher (like poor sentiment) exist, you stick with what’s working, until it doesn’t.
But after such a big run in U.S. stocks, selling that started as “healthy profit taking” in some outperforming sectors has now turned into all out liquidations. Is a violent correction to these sectors just what the market needed in order start another leg of the bull run? Possibly. But given the current interest rate environment and the recent volatility in every major stock market in the world, these liquidations more likely suggest that the global economy may be on the precipice of a recession.
Let’s take a quick walk through global equities for Q3:
-SPX: down 8.7% for Q3, down 11.5% from its 2015 highs, down 8.5% on the year.
-Bovespa (Brazil): down 17% for Q3, down 25% from its 2015 highs and down 12% on the year.
-DAX (Germany): down 11.5% for Q3, down 22.5% from its 2015 highs and down 1.25% on the year.
-Nikkei (Japan): down 14% for Q3, down 17% from its 2015 highs and down 1/2% on the year.
-Shanghai Composite (China): down 29% for Q3, down 40% from its 2015 highs and down 5.5% on the year.
There is no other way to put it, it was a bloodbath for global stocks from July 1st to today. But the 11 trillion dollar question (that’s how much value of global stocks was wiped off the face of the earth in Q3), is where do we go from here?
Regular readers know where we stand. We think it is a foregone conclusion in the coming weeks that we break the August low and possibly even the October 2014 lows at 1820 in the SPX (MorningWord 9/28/15: The Investment Landscape Is Moving Beneath Our Feet).
But it’s not just equities that are informing this opinion. Yes, crude has stabilized but it demonstrates little ability to rally. And continued outflows in almost every asset class in emerging markets combined with daily new lows in industrial commodities, a continued bid of the dollar, the inability of U.S. Treasures yields to rise despite refined Fed speak, continued deterioration in high yield debt and single stock stories like Petrobras and Glencore, that smack of Enron, Bear Stearns and Lehman.
And all of this speaks to a sort of risk aversion we have not seen on this scale since the financial crisis of 2008/09. I cannot dismiss this confluence of events as a run of the mill markets correction. It definitely feels different than anything we have witnessed in the last few years. And it’s eerily similar to the early days of crisis periods past.
So when I hear market participants that I respect defend high valuation, speculative stocks and refer to them as a gift at these levels (following mild corrections) I want to jump out of my chair (as a pundit). Like I nearly did on last night’s Fast Money:
Your guess is as good as mine where a stock market or a single stock will go. But if you are still operating as nothing has happened in the last few months and working from the same bull market playbook that got you to this point, then what we’ve got here is a failure to communicate.