Every exit is an entrance somewhere else.
So the markets have really taken it on the chin lately. I read a blog post via Twitter a week ago that said it was a great time to be greedy. It was widely retweeted by many in the personal finance blogosphere. It's just the kind of confirmation they wanted to hear, but that advice hasn't worked out too well – at least for now.
I've seen plenty of folks chomping at the bit to buy more stocks as prices plummet. Those dividend yields get a lot juicier as the price of the underlying stocks drop! Of course, there's also room for them to get even more attractive, or to be cut if the economy continues to sputter.
Given the tremendous diversity of opinions out there, I thought it might be a good time to do another Bulls vs. Bears wrap-up. Let's take a look at the case for buying vs. selling stocks. Most of you already know that I believe we're in a secular bear market, but I'll throw that out there in advance so that new readers know that I'm not without my own bias. 😉
The Bear Case
Commodities Collapse: Oil, gold, coal and especially copper have taken a real beating as we've entered a new bear market in Canada and the U.S. as well as many other parts of the globe. Many point to the commodities collapse as a sign of economic weakness and problems in China. More on those below.
China Worries: Jim Chanos and many others have been warning that China's real estate market is a bubble waiting to burst for quite some time. They argue that there's a lot of debt hidden at the local government level in China. So while the world is fretting over the sovereign debt of Eurpean PIIGS, another time bomb is ticking further to the East.
Recession Is Here: The ECRI (Economic Cycle Research Institute) just announced that the U.S. Economy Is Tipping into Recession. Some would say this is just a continuation of the balance sheet recession we've been in since the financial crisis of 2007 – 2009.
Valuations Are Not Attractive Enough Yet: Doug Short looks at the P/E10 ratio and observes the following:
Governments Will Act: The presumption among bears is that the political bureaucracy will try to look like it's doing something, but will just keep doing the same things it's been doing so far – which obviously have not worked and have likely made things worse. This toxic combination of prolonged ineptitude and impotence may give rise to more civil unrest as it dawns on average citizens that the trillions of dollars of relief they gave to the banks in the last crisis fixed nothing. (If you still don't understand how this happened, please take a look at The Great Bank Robbery or Banking's Self Inflicted Wounds.)
The Bull Case
Sentiment Too Bearish: Obviously, the most glaring case for buying right now is simply the amount by which prices have already fallen. Yesterday's sharp turnaround from deeply oversold levels had the feeling of a market that had just gone too far too fast.
Valuations are Attractive: Some see the recent fall in prices as a great reason to buy more. They view stocks as “on sale” and just like their favourite discounted cereal, they're going to buy more. Given Doug Short's commentary, I'm guessing the bulls are using different metrics.
Companies Are Flush with Cash: The market concerns are centered around sovereign and bank balance sheets. That doesn't mean that companies who are executing their strategies well can't thrive. The best companies will be insulated and many of them raised a lot of cash in the last crisis.
Governments Will Act: Bulls aren't sure exactly what kind of rabbit governments will pull out of their hats, but they know that when the announcement comes, shorts will run for cover and buyers will run over each other trying to get back into the market. Again, yesterday's late day rally seemed to arise from a rumour that a coordinated plan to recapitalize European banks was on the way.
China Will Save Us: Chinese growth may slow, but will pick up at some point, leading commodities and markets higher.
My 2 Cents
I can understand why many investors might be confused and frustrated at having to deal with another cyclical bear market so soon after the last one. Then again, that's what happens in a secular bear market. It's interesting to note that bulls and bears share some of the same bullet points, but have very different takes on them. A bull would look at the image for today's article and see someone running toward the entrance. A bear would probably see someone heading toward the exit. I guess it depends on the context and on your own perspective.
It's theoretically possible for both the bulls and the bears to be right. It all depends on your time frame. China may indeed slow down. Markets may crash. But even if they do, those with a very long term bullish thesis on China may be willing to deal with that.
Business Insider posted a chart on Tuesday For Those Who Don't Believe History Repeats Itself. It shows that the S&P 500 close on October 3rd of this year was identical to the close on October 3rd of 2008. There were many calls to be greedy at that time as well. As most of you know, the S&P subsequently fell to 666 in March of 2009 before roaring back to its most recent peak around 1370.
So is it time to buy or not? The bottom line is that the answer to that question is always the same: It depends. It depends on where you're at with your personal investment plan. Your plan should be based on your age, risk tolerance, debt levels, ability to set aside extra income and how much money you already have invested.
You may have a passive plan that says you stay invested no matter what because you believe markets will be higher by the time you need to retire. You may have very little allocated to stocks because you're just beginning to save or because you lost confidence in the markets after the last crash. At this point, you may feel like need to make a call on whether you want to enter or re-enter the stock market – or not. That's not an easy call to make. Next time I'll tell you about how I'm handling it.
How are you handling the market volatility?