Bull or Bear – Part II Depends On the Data Points

 In Strategy Updates

A few weeks ago, we wrote in our Strategy Update that the future direction of global stock markets would be dependent on a number of data points — namely China, The Federal Reserve and corporate earnings reports. Since that writing, markets have been volatile — both up and down — and we have gained greater insight into each of these important factors that could support a continuation of the bull market.

The initial, larger than normal, market decline which began in August was set off by fears of an aging economic cycle coupled with a significant slowdown in China and a Federal Reserve which was adamant about raising rates. Investors, including yours truly, concluded that this combination had the potential to result in a global recession and bear market in global stocks. As you may recall, during an average bear market, stocks typically fall 30, 40 or even 50% – not the kind of loss we want you to suffer, hence our more defensive posture in recent months. The good news is that each of these data points appears to have turned more positive in recent weeks.

The most recent GDP report from China suggests that economic growth — though slower — has stabilized. Much of this may be due to China’s aggressive reduction in interest rates since August which supports a more constructive view of growth going forward. In terms of the Federal Reserve’s ongoing soap opera entitled “will they or won’t they” raise interest rates, it appears that they will not in 2015. It seems that the Fed shared our concerns that a rise in rates would likely topple an already fragile global economy. This is supportive for higher global stock prices. Lastly, we have been watching corporate earnings reports very closely in recent weeks and, much to our delight, they have been, on balance, better than expected in most economic sectors — the exceptions being energy and material sectors which, for the most part, we have avoided. Lastly, and the news of this morning, is that Mario Draghi, president of the European Central Bank, reiterated that quantitative easing will continue until September 2016 — or beyond if needed. The culmination of this better-than-expected turn of these data points could easily fuel global equities back up to their old highs and perhaps even further. As you may have noticed, we have been carefully adding stock exposure during all of this volatility in anticipation of this possibility.

Given our more positive outlook, based on data and research, we would caution investors against becoming too aggressive for a few reasons. The bull market is in its seventh year and historically these cycles only last 7-9 years at most. Moreover, the Federal Reserve may have taken a back seat recently, but they will inevitably raise rates at some point in 2016. This eventually will likely have a negative impact on global growth and is usually the impetus that sends the bull market to its knees.

As you can see from our investment style, we remain flexible in our approach to enhancing your wealth and managing your portfolio’s risk. If the markets begin to discount an oncoming recession/bear market, we are prepared to become even more defensive. This risk is managed through your portfolio’s asset allocation, sector management and the use of carefully placed stop loss orders — all in an effort to mitigate catastrophic loss. For now we will continue to closely watch the data points, be diligent about our research process and, as always, hope for the best!

Thank you from our entire team for your vote of confidence in our work. If you have experienced any significant change in your financial situation or would like to discuss your portfolio, please let us know.

Sincerely,

Your Team at Main Street Research