Stocktake: Bear market is a reality for many investors

Apple going cheap, January lows and judging the rest of the year on the first week

Bear market a reality for many investors A renewed bout of China-induced nervousness resulted in stocks selling off hard last week, triggering the usual chatter as to whether an equity bear market was on the way. For many investors, however, the bear market is a reality, not a possibility.

Including dividends, the S&P 500 eked out small gains in 2015. However, the underlying action was troubling: market breadth stank, with a handful of large-cap stocks propping up the index.

Breadth has continued to deteriorate, with the average S&P 500 now 20 per cent off its peak – official bear market territory. The average small-cap and mid-cap stock, notes Bespoke Investment Group, has fallen by 28 and 24 per cent respectively.

Globally, the situation is even starker. Twenty out of 48 national stock markets fell into bear markets in 2015, UBS notes, with many more indices falling below their 200-day moving averages last week.


Far from this being another benign market pullback, says UBS, “we can clearly say that globally, a bear market is already under way in more and more markets”.

Will cheap Apple get cheaper? Apple shares have lost a quarter of their value since May. The stock looks cheap but detractors say that doesn't matter because the company's best days are behind it. Are they right?

Well, Apple certainly looks cheap. If you strip out the company’s $206 billion cash pile, it’s trading on just seven times estimated earnings.

Still, Apple also looked relatively cheap last May, but shares nevertheless tumbled because of stagnating iPhone sales.

“It’s not like you are buying a stock that has all this growth in front of it,” said Wedbush Securities analyst Ian Winer last week. “You are buying a stock where the best days are over. It’s a tech stock, and value stocks in tech just do not work in my experience.”

You often hear this argument with Apple. Nokia, Blackberry, Dell and other tech stocks looked cheap only to get much cheaper, the argument goes; the best tech stocks are invariably expensive, high-growth affairs.

Value investing works in most sectors, it seems, but not with technology stocks.

Really? Statistics from money manager and Alpha Architect blogger Wesley Gray suggest otherwise.

Between 1980 and 2013, the cheapest decile of tech firms returned 15.25 per cent annually, compared with just 1.89 per cent for the priciest firms.

Apple may well prove a value trap – who knows? – but the notion “value stocks in tech just do not work” is pure fiction.

As goes January, so goes year The worst start to a week for European stocks since late 2011 and the worst beginning to a year in history for the S&P 500? Yes, January's early action has been ugly, and market historians say it augurs ill for 2016.

January has long had a reputation as a predictive month for markets, as evidenced by the old Wall Street saying: “As goes January, so goes the year.”

In fact, historians say to be wary if Wall Street does not get a Santa Claus rally; if stocks fall on the first day of the year; if stocks are down in the first week of the year. This year’s early action, they say, has echoes of early 2001 and 2008, both awful years for investors.

Sceptics see this as astrological poppycock. While a weak January is associated with below-par returns, rebounds are not uncommon. Similarly, why should the first trading day of the year be a barometer for the year ahead?

Still, RBC Capital Markets says to beware if stocks continue to decline. It examined data when stocks fell on the first day, first week and first month of the year and found that since 1901, stocks suffered annual declines 79 per cent of the time.

Bear markets are normal Market volatility has erupted again, so you can be sure the media will do its best to frighten the life out of investors everywhere.

You will be told that 2016 is going to be as bad as 2008 and that your pension fund is disappearing; words like “slaughter” and “carnage” will be thrown around with gleeful abandon.

One piece of advice: market frailty doesn't mean the world is ending, as investment strategist and blogger Ben Carlson noted last week.

“They [bear markets] happen. Sometimes stocks go down. That’s why they’re called risk assets. Half of all years since 1950 have seen a double-digit correction in stocks. Get used to it.”