Counter cyclical stocks, those in the consumer staples, health care, real estate, telecom and utilities sectors, continue to have a tough go at things. In fact, as of two days ago this group of bond proxies made a new low compared to all developed market stocks, thereby continuing and reinforcing a trend that has been in place since the middle of 2016. Why is that?
As we navigate a period of market turmoil, its important to remember that non-bear corrective phases typically last six weeks to two months and almost always include several several substantial large rallies followed by selloffs back to the range of the initial low.
Year-to-date the energy sector is the worst performing sector in the developed markets. In the tables below, I highlight statistics from our Knowledge Leaders Selection Universe (KLSU) which captures the top 85% of market cap in the developed and emerging markets.
There are many different ways in which we can measure the severity of a market correction. The absolute peak-to-trough decline is one way. Duration of the drawdown is another. But we can also measure corrections by taking note of the performance of individual stocks, in what is akin to looking under the hood.
This selloff is demonstrably different than other corrections the market has endured this cycle in one important aspect: it has inflationary rather than deflationary notes to it. This is an extremely important point of context because it tells us something about market participants’ anxieties.
With a hint of volatility returning to the stock market this week, we though it good timing to review some of the market-based indicators we follow that help us judge the sturdiness of the market. This is by no means an exhaustive list, but rather a few items to consider when evaluating whether pullbacks are for buying or selling.
Oil prices have pushed through resistance and are breaking out while the US dollar has pushed through support and is breaking down. All of the major industrial commodity prices are moving in lock step, while the global economy appears to be accelerating led by the United States.
By now it’s common knowledge that the stock market is extremely overbought by nearly any measure one chooses to use. This has led many investors to infer a weaker forward return profile than usual on the logic that the normalization in the overboughtness of the market will cause a steep and lasting pullback in stocks.
Bitcoin prices have corrected severely in the last 48 hours. The newsflow suggests investors have concerns about increased regulation in China and South Korea. No doubt these headlines have spooked investors, but I think there is something else at work.
It’s no secrete that fluctuations in oil prices can lead to dramatic swings in headline price inflation, as chart 1 below shows. After all, not only does oil fuel the vast majority of transportation needs, it’s also a critical raw material used in consumer products far and wide, and much of the price swings in oil are passed on to consumers.