The bear market is back.
Not in Britain, at least, not yet. Russia, which was among the earliest markets to recover, and which had rallied by as much as 135% since October at one point this year, is now back in bear territory.
Since peaking for 2009 at the start of this month, the Micex index has fallen by 22%, shedding more than 7% yesterday alone.
So is the Micex just a momentary blip in an otherwise unstoppable global bull market – or is it just the first of many?
The economy’s in a worse state than the World Bank thought
The Russian market might have been the only one to return to bear market territory yesterday. But it was far from being the only big faller.
Markets have been wobbly for at least the last week or so in any case. But the big blow to confidence yesterday was the Washington-based World Bank’s announcement that the economy was in an even worse state than it had thought as far back as – oh, three months ago.
In March, the World Bank reckoned the global economy would shrink by 1.7% this year. Now, despite a three-month stock market rally, it reckons it’ll shrink by 2.9%. The people at the bank clearly haven’t been taking the same happy pills as investors.
The bank also reckons that poor countries will suffer more than developed ones. “Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,” the bank reported. Falling remittances from migrant workers, reduced exports, falling foreign direct investment and reduced aid will hit developing nations hard, it reckons.
But it also warned that stimulus packages and the like carried their own risks unless they are agreed on internationally. “Any country that acts alone – even the United States – may reasonably fear that increases in government debt will cause investors to lose confidence in its fiscal sustainability and so withdraw financing.”
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We should be watching business insiders
It wasn’t just the World Bank’s glum prognosis that concerned the markets, however. Insiders in the US (company executives – people who should know their firms’ prospects better than anyone else basically) are selling out of stocks at the fastest pace since the credit crunch kicked off two years or so ago, reports Bloomberg. This particular rally began at a time of rampant insider buying. So the fact that they’re all taking profits doesn’t look too healthy for the bull case.
“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock price levels,” Joseph Keating of RBC Bank told Bloomberg. Insiders also sold heavily in the first quarter of 2000, just as the air was starting to leak out of the tech bubble. So while it’s not perfect by any manner of means, it’s not an indicator to be ignored lightly.
And as investors became more fearful, the dollar rose alongside the yen and US Treasury bonds, while commodity prices dropped alongside stock prices. In fact, after the latest fall, the S&P 500 is once again negative for the year.
How long will this slide in the markets last?
But for how long will this particular slide in the markets continue? After all, we’ve had a very long rally – it had to run out of steam some time.
Tom Dyson of DailyWealth reckons that there are three key charts that investors should watch. He points out that Russia was among the first markets to turn up, and that “Russian investments are an emerging market ‘hot money’ favourite.” But now it looks like Russia is turning down.
The same goes for the US financial sector, while the chart of an exchange-traded fund based on the US homebuilding sector “doesn’t look pretty either”, he says. “These charts are hinting at a new downtrend”.
It’s hardly surprising. As we’ve noted here before, when this rally started, most people ‘knew’ it was a bear market rally. After all, with the ‘real’ economy in the dire mess it’s in, how could it be anything else? But as stock prices climbed higher, people started to doubt themselves and allowed themselves to be panicked into buying stocks so that they could keep up with the relative performance of the next fund manager along the line.
That’s not to say there won’t be further bounces ahead – markets don’t move in straight lines. But overall, we still favour defensive stocks over cyclicals. And with the tide starting to turn in favour of more defensive plays, now’s a good time to get into them. We take a close look defensives, and in particular, at one of the most neglected sectors of the market, in this week’s issue of MoneyWeek, out on Friday – subscribe to MoneyWeek magazine.
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