The Clarion Call On The Market

On Tuesday The Royal Bank of Scotland's credit chief, Andrew Roberts, made the clarion call to 'sell everything.' He predicts a cataclysmic year faces investors in 2016. A day earlier, a J.P Morgan equity strategist advised investors to sell any rally.

Investors are grappling with an increase in market volatility at the start of the New Year. After celebrating the end of a flat to mostly negative year in 2015, investors least expected the pace of the current January market pullback. As I discussed in this past weekend's post, A Difficult Beginning For The Market To Start The New Year, market swings of greater than 10% have been scarce since 2011. Essentially, the market steadily climbed higher for nearly four years until last August when the S&P 500 Index declined 12.4% from the May high. In other words, investors may have been conditioned to expect lower volatility from stock prices.

Earlier today, Alan Steel, Chairman of Alan Steel Asset Management, a Scotland-based investment firm, wrote the below succinct commentary about the current market environment and the accuracy of strategists' doomsday market predictions:

“Under Pressure…Pushing down on me…Pushing down on you…” 

So just when you thought things couldn’t get any worse, given the state of world stock markets last week, on Monday David Bowie died, and on Tuesday some idiot at RBS tells you to sell everything and stick it in Government bonds and cash. 

Nothing Ever Ch-Ch-Ch-Ch-Changes… 

RBS’s credit chief is the latest in an increase of high profile “forecasters” predicting an oncoming crisis at least as bad as 2008. But before you start reaching for the panic button, spare a thought for researcher and author Philip Tetlock, who studied the aggregate accuracy of 284 experts making 28,000 forecasts and found you’d be better off tossing a coin than tuning in. And what of the financial media darlings who claim they predicted the 2008 financial crisis? Well, if you peddle the same gloom year after year then chances are that one day you’re going to be right - the same way a stopped watch is right twice a day; utterly useless. 

Granny McKay 

You may recall my granny McKay was my fount of all knowledge. She always said there’s two sides to every story. The problem is that all we hear right now is one side: The negative.…China is an economic basket case, oil’s too cheap (rather than too dear), there’s simultaneously too much debt and too much money pushing shares too high (try and work that one out)…Oh, and, “Planet Earth is blue …and there’s nothing we can do”.

Oh, Really? 

Now, I know somebody who actually did accurately predicted the 2008 crisis. His name is Joe Kalish of Ned Davis Research (NDR). Joe made clear in no uncertain terms what was en route. Sadly, few listened. Instead, headline writers at the time were busily obsessed with the joys of leveraged property deals.

It’s Only Natural…

So what’s he saying to it these days? He reminds us stock markets fall by double digits in percentage terms at least once on average every two years.

So it’s natural not unusual. 

But pull backs have been thin on the ground these last 6 years, so this one was overdue. And here’s something else that’s interesting.

Show Me The Money 

In a recent webinar we were reminded that back in 2007, NDR downgraded recommended equity exposure to only 40%, whereas right now they still recommend 70% exposure, almost their highest level... 

So What Should You Do? 

For starters, realise that great investments do not go up in a straight line.

It’s natural to have pullbacks.

But in our fast change investment world today it makes sense to build foundations of caution and value and add carefully chosen funds who seek and hold GARP shares (Growth At Reasonable Price).

And that’s more than just a sound long term investment strategy.

You might say it’s downright “Hunky Dory”.

Alan Steel, Chairman, Alan Steel Asset Management

Knowing the economy is not the market or vice versa, in our recently released Investor Letter, we commented on the fact that we do not believe we are headed for a global recession. Are their challenges facing the economy? Certainly. We do know though, the Fed matters and prior instances of monetary tightening have led to brief periods of higher market volatility subsequent to the first rate increase.

During this period, investors should evaluate their asset allocation to ensure they have adequate investments that will hold up well in volatile equity situations which they can access to fund their lifestyle. From a manager perspective, we are looking to use this opportunity to purchase attractively valued stocks that we believe have been unjustly caught up in the pullback.