Is the Global Market Selloff Foreshadowing a Bear Market?

With global equity markets in “sell off” mode, there are fears of a sustained market downturn.
But many stock market experts wave off those bear market fears.

“Despite this current global sell-off, this is unlikely to be the beginning of a bear market,” said Tom Elliott, international investment strategist at deVere Group. “It’s more likely noise that we will forget about soon.

U.S. markets have been rocked by bond yields and corporate earning concerns, he explained.

“This has rattled investor sentiment and has now rippled across the global markets,” Elliott said.
Wall Street has been hit by a combination of three key factors of late:

Treasury yields in play. “First, the U.S. 10-year Treasury yields reaching 3 percent,” Elliott noted. “This is now quite a decent yield relative to inflation of just over 2 percent, and cautious investors may switch out of stocks into Treasuries as a result.”

An economic peak. There is growing feeling that the U.S. economy is peaking in its current cycle, echoed by Caterpillar’s earnings statement that said Q1 would be the “high water mark” for the year,” Elliott explained.

Tech sector issues. “U.S. big tech is facing a storm of different problems, from greater regulation on privacy issues, to lackluster sales of products, and perceived political vendetta by the Trump administration towards some firms, such as Amazon,” he added.

However, strong corporate earnings growth is projected to continue, and possibly grow over the coming 12 months thanks to U.S. tax cuts.

'Much More Volatile'

Other market experts agree, but also note that the recent global market downturn is worrisome.

“Recent market volatility has put the longevity of the bull market in question,” said James Demmert, founder and managing partner at Main Street Research in San Francisco. “After 18 months of low-volatility markets, things became much more volatile in the middle of January, starting with a 10 percent slide within just weeks. Now two months later stock indexes have still been unable to recover.”

Sustainable market growth seems to be just out of reach of investors, which adds to market jitters.

“Each time stock indexes appear to be gaining strength for a number of days, these attempts have failed to be prolonged and stocks continue to fall closer to the lows of January,” Demmert said.

Even so, investors should be careful about becoming too bearish at this point, he noted.

“First of all, throughout the history of bull markets, 8-to-10 percent corrections are normal occurrences as markets have powered higher over the past several years,” he said. “Though the recent correction in January happened very rapidly, it still remains in the confines of a normal correction.”

More importantly the financial data points for the continuation of the bull market continue to be supportive. Demmert cites the following points:

Price-to-Earnings Ratios. “For example, the current P/E ratio of both U.S. and global stock indexes is about 16.5, which is not indicative of an oncoming bear market. In fact, it suggests that stocks are reasonably priced, if not a value, at this point,” Demmert said.

Economic Growth. Economic growth both domestically and globally is stronger than it has been in more than a decade, he added.

“The U.S. economy is chugging along at 3 percent and global growth is at 3.6 percent,” Demmert said. “This type of economic momentum is not what one would see at stock market tops or the beginning of bear markets.”

Corporate Profits. “We are witnessing a period of significant corporate profit earnings - the ‘E’ of PE ratios,” Demmert said. “This type of growth is what drives bull markets higher and is not the type of environment one would see at the beginning of a bear market.”

Investor Psychology. According to investor intelligence, polls state most investors are quite bearish or indicate the market will decline.

“These polls serve as a great contrary indicator and suggest that markets will probably continue higher,” Demmert said. “When these polls show an overwhelming amount of optimism amongst retail and institutional investors markets typically are at their peak. But that’s not so today.”

Volatility is Likely

The watchword going forward is “volatility” – and lots of it.

“Investors need to be prepared for more ups and downs,” said Jonathan Maula, investment manager at Castle Hill Capital in York, Pa. “As interest rates rise, it creates valuation disruption in stocks. Analysts are a bit concerned that margins are peaking even though earnings may go up due to the recent tax reform.”

Additionally, the Federal Reserve’s big quantitative easing experiment will finally be put to the test, Maula said.

“Even though earnings have been going up the Fed prolonged raising rates claiming the economy was too fragile, which helped create this incredible bull run,” he noted.

Consequently, interest rates are artificially low and will now create a problem if people want to move out of stocks.

“Investors could go into bonds, but rising rates would lead to losses in bond funds or ETF's even though the yield would increase,” Maula said. “Or, they could go to gold or commodities, which have underperformed for a long time.

“For investors, this emphasizes why it’s important to have a diversified portfolio, so you can weather the storm no matter what happens.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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