On bears, bulls and fallen felines
WORDS ON WEALTH:
There's a term used by market commentators of which animal lovers would disapprove. A “dead cat bounce” is a brief upswing in a share’s price after a steep fall. The idea, based on dubious physics, is that a dead cat may bounce slightly after falling from a great height. The bounce is caused by speculators rushing in to buy on the cheap, but the cat remains dead.
Another term, “bear market rally”, describes the phenomenon on a larger scale – a temporary upturn in a downward trending market. A notable example was the rally on the US stock market immediately after the Wall Street Crash.
At the beginning of September 1929 the Dow Jones Industrial Average (DJIA) was 380 points. It fell precipitously, by 47%, to 198 points by mid-November.
But then there was a rally: the index climbed steadily to reach 294 points (up 48%) in mid-April 1930. From there it declined and just carried on falling. Its low point was in July two years later: it was a mere 42 points, representing an overall drop of 89%.
Fast-forward to the calamitous year that has been 2020. Since their sharp drop at the end of March, financial markets have made impressive gains. From mid-February to March 23, the DJIA lost 37%. In the almost three months since, at the time of writing, it has climbed 40%. Another index, the Nasdaq 100, which has a high concentration of tech stocks, is about 20% higher than it was before the fall.
Are we in a V-shaped recovery, or is this a bear market rally – not forgetting that the Great Depression’s bear market rally lasted five months?
Many commentators are cautiously optimistic. They believe the recovery has indeed begun and that, if not V-shaped, it will be U-shaped at worst.
Global asset manager Schroders has recently downgraded its forecast from a V to a U. In a recent article, “Why we think the recovery will be U-shaped”, the firm’s chief economist and strategist, Keith Wade, says that, globally, activity in the second quarter is likely to be as bad if not more severe than in the first quarter.
“However, some of the data suggests we are past the worst: for example, industrial metals prices have stabilised and Google mobility data suggests that activity in the workplace is picking up, albeit from a low level.
“From here we should see activity improve, as lockdowns eased toward the end of May and have been loosened further in June. As a result, the third quarter should see something of a bounce in activity, albeit to a lesser extent than we had anticipated,” Wade says.
He says factors hampering a rebound include governments’ difficulties in lifting lockdowns, fears about a second wave of infections, cautious consumers, the roll-back of government support, and future corporate debt reduction. “All of this means we’ll not regain pre-Covid levels of activity by the end of 2021, making the forecast less of a V shape and more of a U,” Wade says.
However, in an article “Investing for Roubini’s Greater Depression”, Dr Adrian Saville, the chief executive of Cannon Asset Managers, suggests we should take seriously the views of US economist Nouriel Roubini, who in 2006 predicted the global financial crisis of 2008/9.
Roubini, widely known as "Dr Doom", believes we are experiencing a bear market rally, and the global economy has been damaged so badly that we are facing a severe depression.
Saville says: “There is more than enough evidence in the post-pandemic make-up to suggest that we should be paying close attention to a depression scenario. Markers for concern include a collapse in vehicle sales, the imposition of trade barriers to protect domestic markets, falling commodity prices, a wave of consumer debt thanks to easy money, a dive in the federal funds rate, a surge in unemployment, sharp market swings, deepening fiscal deficits, and the risk of a deflationary price spiral. This list bears eerie similarity to the features that characterised the Great Depression of the 1930s.”
Saville’s point is not that it will happen, but that it might. He says we need to factor in this risk by having well-diversified portfolios and investing in assets that are likely to come out strongly on the other side – what he calls “transformative assets”.