Five reasons why stocks have further to fall – MoneyWeek


Thegroupmonitorseightmainriskindicators,includingtheCBOEvolatilityindex,or“Vix”(knownasWallStreet’sfeargauge);emergingmarketequityprices;theSwissfrancexchangerate(a“flighttosafety”indicator);andthethree-monthEurodollar。

WhileASRseesscopeforashort-termshare-pricebounce,drivenpartlybyinvestorsexitingshort-sellingpositions,theirlatestspookreadingssuggest“itwillbeshortlived”。

2。

Stocksarenotyetcheapenough

Whilestockvaluationsmeasuredusingthep/eratiohavebeendroppingsinceAugust,“wearestillfarfrom。

theten-timesmultipleacrosssectors,whichhistoricallyhassignalledpreviousturnsinmajorbearmarkets”,saysRobArnottofResearchAffiliatesintheFT。

TaketheSP500–thehistoricp/eisaround17times,overvaluedbyArnott’syardstick。

ButasJohnAuthorsadds,itlooksevenmoreexpensiveifyouadjustfortheearningscycle,bycomparingpricestoaverageearningsoverthepasttenyears。

Thatputsthefigureatmorelike26。

Thefactthatthemarketisalsohyper-sensitivetoearningsupsets,asrecentsharpfallsinApple’ssharepriceshow,indicatesthatwearesomewayfrom“capitulation”,orthepointwhenpricesaresolowthattheyreflectallpossiblebadnews。

3。

Theendof2007spelledtrouble

Forchartists,thebearmarketsignalscamethickandfastattheendoflastyear。

BackinNovemberwepointedoutthatDowTheorypredictedafully-fledgedbearmarketfor2008。

BillMeridianofCyclesResearch,meanwhile,pointstothefailureofnormallybullishindicators–forexample,lateOctoberandDecemberaretraditionallystrong,andsoisNewYear’sEve。

Thiswasn’tthecasein2007。

4。

We’reata“Minskymoment”

EconomistHymanMinskyisfamedforobservingthatalongperiodofstabilityisinherentlyunstable。

Confrontedwithanapparentlong-termreductioninrisk(theperiodfrom2003to2007beingagoodexample),investorstendtoincreasetheirriskby“gearingup”usingborrowing。

This,asJeremyGranthamnotes,is“contagiousandreinforcing”tothedegreethatriskisignoredanddebtlevelssoar,takingassetpricestothepointwherecapitalgainsareneededsimplytopayinterestonthedebtusedtobuytheasset。

Thensomethinggoeswrong–lastyear’screditcrunch,forexample–andinvestorscutbackonleverage,draggingpricesdownintheprocess。

“Thelogicissimpleandpowerful,”saysGrantham。

Following“themostimportantUSfinancialcrisissinceWorldWarII”,assetpriceshavemuchfurthertofallevenafterthedirecteffectsofthecreditcrisishavepassed。

5。

Bearmarketslastalongtime

Farfrombeingthestartofapainfulbutshort-livedcreditcrunch,theeventsoflastAugustaresymptomaticofamuchlargerproblem,saysEdEasterling,theheadofCrestmontresearch。

Thefactisthatthemajorglobaleconomieshaveactuallybeeninastructuraldownturnsincethedotcombustin2000。

Hebelievesthatthismarkedthestartofthefifthsecularbearcyclesince1901。

However,thistimeequitiesmayhavemuchfurthertofalltomirrorpreviousbearcycles,duringwhichp/eratiosmorethanhalved。

That’sbecausethedotcom-drivenp/eratioof42atthebeginningofthisbearmarketin2000isamisleadingstartingpoint,giventhatpreviousbearcycleopeningp/eratiosaveragedjust22。

Easterling’sresearchsuggeststhattoday’smultiplesneedtosink“byatleastanother30%-40%intothemid-teens”beforeweseetheendofthisbearcycle。

Hebelievesthattheoddityofthepastdecadeisnottherecentsurgeinvolatility,butratherthefloodofcheapmoneyunleashedviaaggressiveinterest-ratecuts(the“Greenspanput”)in2003topropupassetprices。

Thisfooledmanyintothinkingthatanewbullmarkethadbegun。

Theanalysisofthiscentury’spreviousbearmarketsinRichardRussell’sbook,AnatomyoftheBear,backsthisup。

AsRussellputsit,“equitiesbecomecheapslowly”–ittypicallytakesaround14years。

What’smore,ignoring1929-1932,thebottomofabearmarkethasneveroccurredsoonerthanthreetoeightmonthsaftertheFedstoppedcuttinginterestrates,economicnewsstartedtoimproveandsharepriceshadalreadycollapsedby20%ormoreonlowtradingvolumes。

Thefactthatnoneofthishasyethappenedsuggeststhattheworststillliesahead。

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