Bear-Maggedon? I Say It’s A Buying Opportunity

Sell The Rumor, Buy The News

JonesTrading Chief Market Strategies Mike O’Rourke says we are on the brink of Bear-Maggedon. Bear-Maggedon, to him, is the toxic-combination economic-rollover in the face of easy money policy. In this environment, investors will begin to fear the Fed’s ability to combat economic downturn and that will feed the fear which caused the economic downturn to begin with.

His reasoning is simple, the FOMC cut interest rates by a surprising 100 basis points on Sunday, and effectively leave themselves without any more fiscal “ammo”.

 "All of us have just witnessed a central bank expend all of its conventional and unconventional tools to support an equity market that is less than a month from all-time highs … The central bank refuses to let markets clear, which simply extends the period of market volatility," O'Rourke wrote in a note to clients.

In my opinion, there is still plenty of risk in the market but bear-maggedon already happened. What else would you call the panic-selling we’ve seen over the last three weeks? The broad market fell more than 30% in under a month to levels not seen since the last big correction. The move was sparked by fear of the coronavirus impact on the economy and it was largely preemptive. We may see a deep recession and we may not, some sectors are going to hurt badly while some will shine.

The record-setting selloff was so fast and so deep because investors knew the virus was spreading, they expected an economic slowdown, and they expected an FOMC intervention. With the benchmark cut to 1.25% earlier this month and a high expectation for another 75 basis point cut this week there really wasn’t much more the FOMC could do, anyway. However you look at it, the rate cut was a sell-the-rumor event, now the event has passed it's time to start buying stocks at their deepest discounts in over a decade.  

The Technical Picture Isn’t As Bad As It Looks

It’s hard to look at the chart of the S&P 500 (SPY) or any major index and not feel some pain. Accounts that were up just a few weeks ago are down 30% or more now, not something any investor every likes to see. Even so, taking a long-term view of the market, the technical picture is still sound. For those of us like myself that believe we’ll get through the virus issue relatively quickly, the long-term view is enticing. The long-term secular trend is up and we are on the cusp of another primary entry to that trend.

Today’s action shaved more than 10% off of the broad market S&P 500 and put the index at a multi-year low. Even so, at this level, the index is above a critical support level and bouncing from the ong-term uptrend line. The uptrend line has been in effect since 2009 and is a point of possible rebound given the oversold nature of the market. The extreme low I would expect to see, the critical support level that must be held by the bulls, is near 2,346 and the lowest low of 2018. The stochastic confirms support is present and more, it is showing a strong bullish crossover that suggest prices could rebound at any time.

Price action may continue to test support at these levels in the near-term but it should hold for two reasons. The first is that stocks are trading below their long-term 5 and 10-year average P/E’s for the first time in years and at historically low valuations. The second is because the outlook for economic activity is positive. There is going to be a hiccup in growth for the 1st quarter, slowness will spill over into the second quarter, but by the third quarter, we’ll be back on track and again. Longer-term, the combination of value, outlook for recovery, and copious amounts of fiscal stimulus make the S&P irresistible for me.

It’s All About Earnings

With China already showing substantial declines in the rate of newly infected persons it is clear this threat will pass eventually. The silver lining to this year’s weakness is next year’s strength. The S&P consensus for 2020 is falling rapidly and likely to hit zero before the end of the year but the reverse is true for 2021.

The consensus for 2021 was hovering above 10% before the virus threat arose. Since the onset of the virus, the average estimate has only ticked higher. Add in the impact of today’s low-interest-rate environment and pent-up demand from social distancing and the rebound is likely to be much stronger than anticipated.

I know it’s hard to buy stocks when the market is in freefall but remember this; times are always darkest before the dawn. In just a few weeks things are going to look a lot different than they do right now and this opportunity may have passed. I’m not trying to call a bottom or catch a falling knife but at these levels, it would be foolish for long-term investors not to make some small, strategic purchases of blue-chip and safe-haven dividend payers. If the market falls again, buy some more at even lower prices.