If you ever have the chance to walk down London’s Oxford Street, as I and many tens of thousands of tourists did this week in celebration of Queen Elizabeth’s “Diamond Jubilee” — the 60th anniversary of her reign — you’d likely come across a copy of this poster sold in every souvenir stand.
“Keep Calm and Carry On” was a poster produced by the British government in 1939 during the beginning of the Second World War to help raise the morale of the British public in the event of invasion.
It’s also advice that would serve you well in the midst of the current sell-off in global stock markets.
Summer Sell-Off 3.0
The current market sell-off seems like a reprise of 2010 and 2011, with financial markets heading toward summer in a panic. The plot is also eerily familiar. Greece may be forced to exit the euro zone. The Spanish banking system is under pressure.
This time around, the United States contributed to the negative sentiment, as well. U.S. manufacturing cooled in May. There was the third consecutive month of disappointing payroll gains. And U.S. GDP growth in the first quarter was revised down to a 1.9% annualized rate.
As someone who manages money — and not just writes about it — it is a challenging time. Unlike when I was a mutual fund manager and my job was to be “fully invested” through thick and thin, I am forced to make decisions on whether to ride out these sharp corrections — or to put a big chunk of my clients’ assets in cash.
On the one hand, my clients are understandably worried.
On the other, it is astonishing how little objective data is causing the recent decline.
So, I am going to go out on a limb here: I think the current sell-off is massively overdone.
And I think when you look back in six months, this week will be the buying opportunity of the year.
The Bullish Case — The Fundamentals
You don’t need me to tell you about the bearish case for global financial markets. Just look at the headlines, turn on the TV, or visit any financial website.
But here are three reasons to be bullish, which you won’t find in a media that reports 13 negative stories for every positive one.
First, U.S. stocks are relatively cheap. The S&P 500 is back to trading at just over 11 times 2013 earnings. That’s hardly a euphoric level that signals the onset of a crash. Recall the words of Sir John Templeton:
“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”
If anything, we’re at the “pessimism” phase of this cycle and not at “euphoria.”
Second, falling oil prices are their own “stimulus package” to U.S. consumers. Just three months ago, Brent crude prices were trading above $128 a barrel. Today, Brent is trading at $97, and with speculative capital exiting the oil market at a relentless pace, I expect oil will be down below $90 or less by September.
Since two-thirds of the price of gasoline is determined by the price of oil, that should continue to lower prices at the pump.
A plunge in oil prices has knocked more than 30 cents off of the price of a gallon of gas in most parts of the United States since early April. Nationally, the average price for regular gas has slipped to about $3.59.
Deutsche Bank estimates that if gas falls to $3 a gallon, the reduced pricing frees up $100 billion in annualized consumer spending.
All of this adds up to more money in U.S. consumers’ pockets.
Third, a U.S.-led transformation of the natural-gas market will boost the global economy no matter what the price of oil does. The shale boom in the United States has helped it surpass Russia as the world’s biggest producer of natural gas, bringing the country closer to ever-elusive energy independence. Natural gas is poised to overtake coal as the second-most widely used source of energy worldwide by 2025.
Throw in the prospect of an energy-friendly Romney presidency, and you can argue that the United States is at the cusp of an economic boom.
The Bullish Case — Investor Sentiment
I’m a big believer in the distortions caused by market psychology. And there are some terrific ways to quantify these mood swings.
According to sentimentrader.com, since 1950, there have been 12 occurrences when the S&P 500 violated its long-term, 200-day moving average on such a steep drop as it did on Friday. Three months later, the S&P was positive 10 of those times. The exceptions were the crash in 1987 and a tiny loss in August 2011. And even August of last year was eventually followed by a robust rally of over 20%.
The bottom line?
The current sell-off could turn into a once-in-a-decade kind of rout. But the odds are against it.
That doesn’t, of course, mean that stocks can’t continue to fall today…
But look for stocks to bottom sometime this week. And strap yourself in for a wild ride.
Nicholas A. Vardy
Editor, The Global Guru
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