Correction looms, but bear market unlikely

Will the latest market pullback be another minor “buy the dip” affair? Or is a correction, or even a bear market, on the cards?

S&P 500 pullbacks have been short-lived over the last two years, but the latest one could morph into a double-digit correction.

The small-cap Russell 2000 has already fallen 10 per cent, while the MidCap 400 index last week fell below its 200-day moving average for the first time in two years. The broad deterioration in breadth is reminiscent of previous market tops.

However, the current environment is different in one key respect. At the 2000 market top, the technology sector accounted for a third of the S&P 500’s market value. In 2007, financials were top dogs, with a sector weighting of almost 30 per cent. When technology and banking stocks crashed, the market inevitably followed.


Today, no sector dominates. Technology is the biggest sector, but its 19 per cent weighting is almost unchanged since 2009. As US money manager Brian Gilmartin noted recently, today's is a very "democratic" market, with normal growth-rates and sector weightings.

Market breadth, then, suggests further weakness, but sector weightings indicate investors will avoid a third bear market in 14 years. Learning to love crashes Some bears think we should be wary, even warning of a 1987-style crash. But would that be so bad?

No, says money manager and blogger Ben Carlson. Yes, Black Monday's 20 per cent fall was the worst one-day decline in market history.

Yes, stocks lost more than 30 per cent over a four-day period.

However, the index still ended 1987 with gains of 5 per cent, Carlson notes.

The bull market soon resumed, gaining 120 per cent from 1987 to 1992.

Few remember this, a “classic case” of short-term loss aversion “overwhelming long-term market gains”, adds Carlson.

Crashes also allow investors to buy cheap. The worst outcome would be if stocks drifted sideways for years, gradually working off their overvaluation but yielding little in returns and little opportunity. That, not a short-lived crash, is the nightmare scenario. Ugly duckling indices 'cheap' US markets may be pricey, but many international indices are "exceptionally cheap", says money manager Mebane Faber.

Faber's Cambria fund looks for the world's cheapest markets, ugly ducklings like Russia and Greece (Ireland also makes his shortlist).

Right now, that bucket of indices “is the cheapest it’s been since the bottom in 2009, the bottom of 2003 and the early 1980s”, says Faber.

Buying into such countries brings obvious risks, and can take time to pay off (the Cambria Global Value ETF is down slightly in 2014).

However, the best investments are not always obvious ones.

The second-best performer in Faber’s fund has been the country attracting the worst headlines – Russia.

Being Bill Gross Bill Gross may have lost his touch, but critics are wrong to suggest he has lost his mind.

The legendary bond manager shocked investors by announcing he was leaving Pimco, the firm he founded. Since then, there's been much reference to his apparent meltdown at an investment conference in June, where he turned up wearing shades and described himself as the Justin Bieber of bonds.

In recent client letters, critics add, he talked about the “erotic” value of sneezing (“it feels sooooo good”) and the death of his cat.

The thing is, Gross has always been eccentric. Older client letters dwelt on reasons for shaving his moustache and why he once left a bad waitress a “negative tip” as well as more philosophical musings on youth, old age and death. They could be simultaneously bizarre, smart and entertaining.

Bill Gross hasn’t had a meltdown. He’s just being Bill Gross.

Turnaround time for Tesco? Tesco investors have seen their shareholding halve in value over the last 18 months, following recent profit warnings and accounting shenanigans.

Might a bottom be near? No, say analysts – Tesco has more sell than buy ratings, a rare thing in the usually bullish analyst community.

Mind you, analysts are not especially prescient. In July, Cantor Fitzgerald slapped a 325p price target on shares, saying Tesco’s UK business was 35 per cent undervalued relative to peers.

Today, shares are around 180p.

Studies of profit warnings show it rarely pays to catch a falling knife. One UK study found shares underperform leading up to profit warnings and continue to do so over the next year. After that, things often turn around, the average stock outperforming by 22 per cent.

No two cases are identical, but the study indicates that while lower prices may follow, an eventual Tesco turnaround is more likely than it currently appears.