Why the bears are afraid of a black swan

10th February 2016


Sense must prevail over the negative outlook to break the current market impasse, says Rowan Dartingon Signature’s Guy Stephens…

Market sentiment is currently pretty negative. We all know that during times like these, history tells us that you should close your eyes and buy without over-thinking the current scary outlook. However, that is much easier said than done and feels more like foolhardiness and gambling than investing.  Many are still saying that equities are the most attractive asset class taking into account the boost to consumer spending from the falls in commodity prices and the bonanza this is providing to businesses in terms of their cost base. In addition, wage growth is subdued so retailers are well placed to earn super-normal profits as the consumer spends his windfall gain.

The oil price is the nub of the bearish sentiment and it is viewed that without any movement at the OPEC table and beyond, this will lead to an inevitable spate of bankruptcies which could damage the banks who have been lending indiscriminately to the fracking sector. This appears unlikely and irrational when you consider the stress tests that have recently been carried out and how much better capitalised they are today than in 2008. Investors are doing a fantastic job of talking themselves into a bearish scenario before one actually exists. If I could draw a cartoon it would show a blindfolded bear frantically searching for an elusive but circling black swan, possibly dripping with oil!

Other popular asset classes are looking less attractive with residential property facing a temporary squeeze up as would-be landlords try to beat the deadline for when stamp duty rises. We are becoming a little more cautious of commercial property which delivered double-digit returns last year as the likes of Kingfisher, Morrison’s, Argos and Carphone Warehouse all announced their further conversion from ‘Bricks to Clicks’. Meanwhile cash and fixed interest still seem to have little up-side, with fans having to be very negative on the economy, preferring small basis point returns to perceived catastrophic losses. Appetite for Gold has increased since the beginning of the year, not surprisingly, given the bearish outlook.

Whilst the number crunchers have lauded the fact that we must be in a bear market because many major markets are 20% down, the overall tone also feels bearish but nailing down a consistent reason is difficult. Even the analyst at RBS with his recent ‘cataclysmic’ quote had to list 16 bullet points to conclude that we should sell everything. Historically, black swan events have been caused by bubbles which only became apparent when something defaults thereby exposing the mirage of false expectation and valuation. Ever since Lehman Brothers performed that role in September 2008 leading to the credit crunch, economists and commentators have been looking for the next black swan event that will bring markets to their knees once more. The more the supposed experts reveal a catastrophic scenario, the more this undermines sentiment as investors worry about what they don’t know.

As time ticks by and a black swan doesn’t emerge, a rational investor would assume that they should stop worrying about that particular scenario and focus elsewhere for their insight. This is potentially appropriate for the Chinese economic slowdown where the intensity of the concern comes and goes. We have worried about an Emerging Market defaulting and we have had two in the last fortnight but neither event has caused a major shock as they have sought loans from the IMF. More recent worries are centred on global growth slowing and whether the banks really are strong enough to cope with whatever defaults are coming from the oil industry.

Whichever bear story you choose, and there are many around at the moment, all would appear to lead to a calamitous fall in asset prices and economic disaster. The US employment payroll numbers missed forecasts by 38,000 on Friday, confirming evidence that the US (and the world) is going through a soft patch, started by the weaker Q4 GDP statistics recently released, even though these are yet to be revised in February and finally confirmed in March. The unemployment rate was a positive, dropping to the lowest level since February 2008 and there was good news on the wage growth front as well. However, the markets sold off, sparked by negative comments in the technology sector amid concerns over Facebook numbers and valuations in the whole sector.

We remain cautious but optimistic that sense will prevail and break this current market impasse. Once that happens we can then move on and if we get an opportunity at lower levels to deploy some cash, then we will. If we are currently at the lowest levels, then we will also enjoy the bounce back, comforted in the knowledge that the worst is behind us, even if we could have made a speculative punt that we didn’t.


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