Tuesday, December 1, 2015

Are markets primed for a 25% drop -- e.g. the big correction?

So despite all the BS news over the past few months, if you had bought the S&P500 or the DJ industrial you would have assumed that 2015 was a very quiet year for investors -- the S&P started at 2020 and today is trading around 2100, a 3.9% increase and if you add your dividend (a whole 1.9%) you are looking at total revenues of 5.8% -- before tax not too shabby and certainly better than what a bank deposit will give you.  In a nut shell 2015 has been a good year for investors, at least better than for depositors.

So what about 2016?  One of my very favorite commentators is Bob Janjuah -- an old colleague with tons of street smarts.  He's the voice of reason and a very good macro commentator.  He was long the whole year and told his clients to stay the course -- if not increase position when the market soften. He's now gone full bear told his investors to liquidate their positions in September on the often heard rumor that the feds were going to raise rate -- their last chance before the 2016 presidential election. Its now December 1, and nothing has happened so far.  The state of play is as follows:
  • America, as an energy exporter, doesn't like lower oil prices
  • America has a weak recovery (although better than what the Bush years produced
  • Europe could have a better 2016 than the market thinks
  • Japan will have more QE -- because the economy is back in recession
  • China is facing difficult decisions -- and is finding that the usual levers of control don't work too well anymore -- China is the big unknown.
Overall, what we are seeing is growth but tepid growth, if the Feds decide to raise rates...then recession will follow, because the US recoveries are getting weaker and weaker -- Europe and the emerging economies could not sustain much tightening and China is being China.  His view is that real earnings are stagnating -- at best!  Steady earnings are a poison to earnings multiples that are justifying the current very high p/e numbers.  The death of growth will directly impact p/e ratios and therefore Bob's call for a 25% market correction.

Finally, and this is one if my favorite factoids:  The economy always grows better when the White House is occupied by a democrat -- and that's been true for the past 50 years.  Budget deficits are always smaller, and the the tax base shrinks.  When the GOP takes control -- the goody train goes full blast for the rich folks and everything else gets screwed (the deficit, wages, the economy).  Cannot think of a better reason not to vote for the GOP (wait there are 17 good reasons not to vote GOP -- starting with Trump...)

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