Not even Buffett and Bolton can pick the bottom of this great bear market. The catalysts are in place for a market turnaround, but will they be enough? Regardless, the brave will be buying now.
I was wrong.
Two weeks ago I suggested Friday 10th October 2008 would be the bottom of this great bear market. On that day, at one stage the FTSE 100 index was down over 10%, hitting an intra-day low of 3874. It recovered somewhat to end the day down 8.85% at 3932.
Fast forward to last Friday 24th October 2008, and during another gut-wrenching day for stock market investors, the FTSE 100 index hit an intra-day low of 3715, before closing down 5% at 3883.
At least I’m in decent company in getting my timing wrong. Warren Buffett said just over a week ago he was buying US stocks for his own personal portfolio. In the week following Buffett’s declaration, the Dow Jones Industrial Average lost 6.7%.
Then there is the UK’s own Anthony Bolton, who three weeks ago said “We’ve seen the bottom of the abyss”, and announced that he’d invested some of his own money into shares, and was continuing to do so. In the last three weeks, the FTSE 100 index has lost over 1000 points, or 22%.
The scale and speed of the stock market’s decline has been quite unbelievable, both to me and probably to master investors like Anthony Bolton too.
Two Negatives Don’t Make A Positive
What Next?
The problem, right now, is that there is nothing but negative news hitting the wires. We’ve got…
- Gross domestic product (GDP) contracting by 0.5% in the quarter ended September 2008, virtually confirming we are already in recession.
- Hedge funds still dumping shares in order to meet investor redemption requests, and/or to meet margin calls.
- Emerging economies like Ukraine, Hungary and Belarus seeking emergency funding from the International Monetary Fund (IMF), indicating there may be more trouble ahead for the global economy.
- The prospect of corporate earnings falling by 40% by the end of 2009, as a deep and long recession bites.
Stock markets typically rise too far on the way up, and fall too far on the way down. On the way down, they typically need a catalyst to spur a sustained recovery.
We had one such catalyst 2 week’s ago when the UK Government took large equity stakes in Royal Bank of Scotland (LSE: RBS), Lloyds TSB (LSE: LLOY) and HBOS (LSE: HBOS), a model that was largely copied in western economies around the globe.
But the euphoria surrounding that catalyst was short-lived, as the market realised that although the global banking system was saved from a complete breakdown, there was no avoiding a global recession.
Two Catalysts To Turn This Market Around
There are two potential short-term catalysts to reverse these plunging stock markets…
1. A sharp and unexpected easing of monetary policy. For example, the Bank Of England could cut interest rates by 100 basis points to 3.5%.
2. The Government announces a massive fiscal package aimed at restoring consumer confidence by pumping billions into the economy in the form of tax cuts, spending on key infrastructure projects, mortgage relief for distressed home owners, and basic handouts to the most needy, including the unemployed.
The only problem is that they are, in Donald Rumsfeld speak, “known knowns”. Economists and stock market analysts across the globe know that interest rates are heading down, and they know Governments are preparing huge spending packages to hopefully avoid a Japanese style L-shaped recession.
In this market, because it is so fearful, because it has fallen so far, and because there has been a dearth of positive news, there is a chance “known knowns” such as those above could be the catalyst to stop the rot. Then again, as we’ve seen to date, they might just provide us with a short-term fillip, before hedge fund forced and other random panic selling sends the market packing again.
These are nervous and unprecedented times. As Kenneth Griffin, founder of Chicago based hedge fund Citadel Investment Group said last week, “I have never seen a market as full of panic as I’ve seen in the last seven or eight weeks.”
Known Unknowns
So what should you do now? Nothing? Something? Buy? Sell? Hold?
In the short-term, this market is impossible to predict. It might go up a few hundred points today, and might plunge a few hundred points later in the week.
My only reference point for a market like this came in the first months of 2003. During that time, as the market fell, to maintain their regulatory solvency ratios, insurance companies were forced sellers of shares.
As they sold, the market kept falling, and as the market kept falling, insurance companies they were forced to sell more. Eventually, as I recall, solvency ratios were relaxed and/or varied, the forced selling stopped, and buyers returned in force.
This time around we have a different scenario. We have forced selling, but we have masses of debt, both in the household and commercial sectors. The debt is not suddenly going to go away, as did insurance company solvency ratio requirements. We have few known knowns, but plenty of known unknowns, or things we know we don’t know.
The Brave Will Be Buying Shares
I retain faith in the stock market, the long-term health of the economy, and the intellect of the people tasked with steering us through the greatest financial dislocation we’ve all seen in our investing lifetimes.
The market will turn. Like Buffett and Bolton, as you can see by my failed prediction of 2 weeks ago, I can’t say when it will turn. If history is any guide, markets may rise quickly and unexpectedly, especially if a known unknown is suddenly unleashed upon us, like a moratorium on mortgage repayments for those most financially stressed, or an emergency 150 basis point cut in UK interest rates.
If you’ve stayed invested in the market this long, I reckon you ought to stay the distance. The brave will be buying.
More: Seven Reasons To Be Pessimistic
> If you are brave and want to follow Warren Buffett and Anthony Bolton’s advice, you might want to check out The Motley Fool’s Champion Shares newsletter service. Its share tips are down, but down by less than the market. You can try it free today for 30 days with absolutely no obligation to subscribe, guaranteed!
> Of the companies mentioned in this article, Bruce Jackson has a very small beneficial interest in HBOS shares.
