Fundamentals are nearly always strong when the market starts to sell-off
* Global equity markets slumped last week, losing 5.6%, the worst week since January 2016.
The index has now dropped 8.8% from its recent high, having at one point been down over
10%, and volatility has snapped higher. To all extent and purpose the selling appears top-down
led, with all indices down by a similar amount, particularly when viewed in US dollar terms.
However there are some exceptions, most notably Japan, which fell 8.1% last week in the face
of a strengthening Yen. China was also weak with the CS300 off over 10% last week. And MSCI
Germany has seen the biggest peak to trough losses. So clearly currency, or more specifically
US dollar weakness, is going to be a contentious issue in 2018.
* When markets correct, the standard retort is that in the long-term it pays to stay invested and
that the fundamentals remain strong and supportive. So we had a look at prior corrections in the
S&P 500 to see how fundamentals looked at the point when the market turned. Using data since
1985 (as we wanted to include consensus growth expectations) at the point when the S&P 500
dropped 10% or more, on average the US ISM index was at 51.6 (indicating economic
expansion), trailing EPS growth was on average running at 7% and forward growth expectations
were at 11%. The point being that at the top, economic fundamentals always look strong and
this is why interest rates are going up. It is interest rates, not growth, that is the concern.
* How long it takes you to recover from your index price loss varies widely; the mild corrections
in 1998 and 1999 took under 90 trading days to get back to the initial index level. This compares
to the 2000 and 2007 corrections which took over 1800 and 1400 days respectively to recover
the prior price level. In such long draw down periods, the compounding dividend takes on added
performance, as in total return terms although you made no money in price terms from 2000 to
2007, at least you made 12.5% via the dividend. Another good reason to avoid dividend cuts.
* So far we have seen very little in the way of fundamental stock price discrimination. During
the worst day of selling, we saw some of the lowest ever cross sectional stock dispersion for a
down market of such magnitude. In brief it looks like investors were selling markets, not stocks,
a fact also reflected in the initial outperformance of small-caps versus large-caps.
* So far we have seen very little in the way of fundamental stock price discrimination. During
the worst day of selling, we saw some of the lowest ever cross sectional stock dispersion for a
down market of such magnitude. In brief it looks like investors were selling markets, not stocks,
a fact also reflected in the initial outperformance of small-caps versus large-caps.