Are We In A Bear Market?
The bull market is on track to celebrate -- barely -- its seventh birthday next month. But many strategists and money managers believe that this old bull won't see a cake with eight candles because it's already rolling over into a vicious bear market.
We won't know for sure if that's the case until the S&P 500 takes out the 1700 level and stays below there for a week or so. And there's one driver that will keep bullish investors' hopes alive even during that drop: the economic expansion hasn't rolled over yet and it's rare to have a bear market without a recession.
Who is right? It's critical that you weigh the arguments and evidence of each side because if the bears are right, it could mean another 20% decline in the S&P 500 to 1400. And if that happens, your individual stocks will lose much more on average, even if you are buying dips "on the way down."
In this report, I will lay out the key arguments of both Bulls and Bears on 3 crucial issues to find out who you should listen to.
Earnings Recession Nightmare
This is the biggest driver of the stock market correction right now. In fact, back-to-back quarters of negative earnings "growth" were what caused me to take a big bearish stance last October, looking for a big "valuation re-set." But the Q4 seasonal appetite for stocks ignored these facts right through the holidays.
Then the bear began the New Year with a vengeance, even before earnings season started and we found out Q4 is working on a net decline in year-over-year growth of minus 6.5%. Granted, a large part of falling earnings is related to the declines in oil and the energy sector. But, QE-driven buybacks and other financial engineering cannot stem the tide and the spillover effects are showing up as Q1 earnings estimates drop fast to -7.5% "growth."
And now the forward outlook for Q2 has dropped into negative territory. As I've been saying, "Earnings guess-timates for the next year are in jeopardy of being cut. Investors should beware of Wall Street strategists and their guesses and price targets because the market may not be a reasonable value again until S&P 1700."
Score this one for the bears, while bulls meekly point to the earnings yield and another nominal "record" of corporate profits.
MORE . . .
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Warning: Bear Market Ahead
The average bull lasts 63 months. We are already 83 months into this one. The question is not IF the bear will strike but WHEN.
Are you prepared? Are you sure about that?
If not, you have only 2 days to download Zacks' Bear Market Game Plan absolutely free. It unfolds a strategy for not only surviving but also making substantial money from a declining market. Important: Deadline to get the free report is midnight Sunday, February 14.
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Broken Charts Everywhere
While the S&P 500 and Nasdaq 100 indexes looked strong at the end of 2015, other broad indexes were breaking down left and right including the NYSE Composite and the Russell 2000. That's because a small group of large-cap stocks were holding up the market.
But underneath the surface, the "breadth" of the market was horrible, with thousands of stocks already in their own bear markets with 30-60% implosions. The correction has taken the representative indexes, the NYSE and the RUT, to their June 2013 lows. If the S&P were to follow, it would go back to 1560.
I don't think the correction gets that bad. But the market is still locked in a major downtrend and is "guilty until proven innocent" as traders like to say. What sector is supposed to lead when even the earnings champs like Technology, Healthcare, and Retail are losing power and money runs into defensive areas like Utilities and Staples, while Financials are starting to look as bad as Energy?
Bears also win here, but bulls can talk about attractive valuations at S&P 1700 and "buying the fear" as long as there's no recession.
Economy Stumbles Again
The manufacturing decline has become entrenched with the ISM readings below 50 -- the expansion vs. contraction level -- for four months straight. This is the worst streak for this key indicator since the Great Recession days of 2009.
Even though this sector is less than 15% of US economic output, the slowdown is beginning to spill over into the services side of the economy with a big drop last month in the ISM non-manufacturing survey. When you factor in the global slowdown being imported from Europe, China and other Emerging Markets clobbered by the commodity collapse, you can see why several big banks like Citi and Bank of America have raised their recession probabilities to 50% or greater.
You could almost score this one for the bears if it were not for the strong US consumer. Impressive job growth and resilient spending in housing, autos, and discretionary areas keep many economists in the "no recession" camp. Even wages were seen edging up in the last government employment report.
Yes, much of this is lagging data and tends to be strong at the end of cycles. But this economic cycle is a bit different with its "neither too hot, nor too cold" pace and the output gap is still sizable.
Score this one for the bulls by a nose, for now, as there is always the potential for overly pessimistic global capital markets to tip us into recession.
Where Do I Stand?
The earnings recession is still the biggest concern on my mind. It automatically spells lower stock prices as long as the forward estimates are still in jeopardy. It's one thing to pay 16 times forward earnings that are still on an upward trajectory. But you don't pay that for earnings on a downward glide path.
And right now, with full-year 2016 estimates for the S&P 500 slipping to $117 (from a projected $130+ this time last year), the S&P at 1900 is trading over 16X. If those estimates fall, the market keeps getting more expensive. And I think that makes most fund managers net sellers until this "valuation re-set" is over and they know more about the earnings and economic horizon.
As for the economy, I am a big believer that this "plow horse" expansion can continue to chug on and become the 3rd longest at over 92 months by spring of next year. Could a bigger stock market crash cause a coincident collapse in confidence that impacts spending decisions from the board room to the kitchen table, thereby pushing the economy into recession?
Sure it could. But we just don't have a picture that looks that way right now. What we have is a market searching for a bottom and offering lots of opportunities to trade the big, volatile swings in different indexes, sectors, and styles from growth to value. Even momentum strategies don't die in a big correction -- they just get juicier.
The key to investment success in 2016 will exist in being one step ahead of the crowd on the earnings and economic data so that when everybody is calling for the end of the world, you will already be buying the fear with both hands.
What to Do Right Now?
I detail the specific approaches you'll need to take to prepare for the Bear Market in my Special Report, Zacks' Bear Market Game Plan.
This report reveals my best strategies for making the Bear pay YOU while most other investors are paralyzed with fear during the difficult days to come.
Your chance to download this free special report ends midnight Sunday, February 14. If you’re interested, you’ll need to act quickly.
Look Into the Bear Market Game Plan Now >> >>
Good Investing,
Kevin Cook
Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for accurately predicting and tracking market movements. To help Zacks members prepare for the inevitable, he has released his Bear Market Game Plan.
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