Investors fret over global slowdown
Last Wednesday was an especially bloody day for stock markets. Tech stocks were hammered, with the Nasdaq's 4.4 per cent fall marking its biggest one-day drop in seven years. The S&P 500 and Dow saw their gains for the year wiped out in a matter of hours.
The rapidity of the recent falls has been eye-catching, but the US has only been playing catch-up with what has become a truly global sell-off.
Asian stocks have lost $5 trillion this year, last week falling into a bear market. Every G20 country except the United States has experienced a double-digit percentage drawdown this year, notes Pension Partners' Charlie Bilello. "One could dismiss one or two of these data points as outliers," cautions DataTrek Research founder Nicholas Colas. "But taken as a whole, they clearly show global macro concerns over worldwide economic slowing and possibly a synchronised recession".
Clearly, investors everywhere are worried. Topdown Charts head of research Callum Thomas notes almost 80 per cent of global stock markets have experienced a death cross – that is, their 50-day moving average has crossed below the 200-day moving average, something often viewed as signalling a major trend change.
Death crosses in 2000 and 2007 did indeed signal we were in a global bear market, but there’s some truth to the old joke that markets have forecast nine of the last five recessions. Ritholtz Wealth Management’s Ben Carlson points out that two-thirds of market corrections have occurred outside recessions.
That’s echoed by Thomas, who notes the number of death crosses “can spike during a correction as well as a bear market”. Most likely, it’s “more akin to an oversold signal, and while it’s important to remain vigilant, contrarians should pay close attention”.
Changed Fed "no longer has the markets back covered"
The last time markets were as fearful as today was near February's bottom, but there are two key differences, influential Allianz economist Mohamed El-Erian noted last week. One, investors appear less keen on buying the current dip. Two, the Federal Reserve is increasingly inclined to shrug off market declines.
The two are related, of course. Over the past three decades, the Fed has been acutely conscious of market sensitivities, routinely coming to the rescue in times of turbulence. This time around, however, the Fed has indicated it’s not going to be easily spooked into postponing planned rate hikes.
In September, Fed chief Jerome Powell noted valuations were high relative to history and that a correction would not be unusual. Similar noises have been uttered this year by his colleagues James Bullard and Robert Kaplan, with the latter saying market corrections "can be healthy". Powell's predecessor, Janet Yellen, described valuations as high on multiple occasions, most recently during February's correction, just before she left her post.
The Fed’s nonchalance has been noted by markets, with Merrill Lynch’s October fund manager survey showing investors believe stocks would likely have to fall a further 10 per cent before Powell would consider stopping rate hikes. As El-Erian puts it, the Fed “no longer has the markets back-covered”.
Amazon: from trillionaire to bear market
Things can change quickly in markets, as Amazon shareholders have discovered. In September the company became a trillionaire, and there was no shortage of commentators speculating Amazon, and not fellow trillionaire Apple, would become the first company to top the $2 trillion level. Such talk has stopped. Last week, the stock was on the verge of falling into a bear market, having plunged 19 per cent from September's lofty peak.
Painful as that is for Amazon bulls, they can’t complain. Investing is meant to be a tricky business, and that’s traditionally been the case with Amazon. It experienced bear markets in 16 out of the 20 years between 1997 and 2016, with the average drawdown being 36 per cent.
In recent years, however, it’s been a nerve-free ride. Amazon’s market capitalisation increased by almost $600bn since March 2016 and shareholders didn’t even have to break sweat to bag that gain – not once during that period did the stock fall below its 200-day moving average. That was more than twice as long as the stock’s previous longest winning streak, Bespoke Investment noted recently, but the run finally ended last week. For Amazon shareholders, it’s a reminder that while investing can be rewarding, it’s not meant to be easy.
In numbers
11 – The percentage of S&P 500 stocks above their 50-day moving average, the fewest since February 2016.
20 – The average S&P 500 stock has fallen 20 per cent from its 52-week high.
30 – There are twice as many US stocks down 30 per cent from their 52-week high than within 5 per cent of their 52-week high.
34 – The percentage of US stocks above their 200-day moving average, also the fewest since February 2016.
