I awoke to the hint of snow in Virginia yesterday as I prepared to work my way to Richmond to speak at the CFA Society Annual Forecast Dinner. As some of you know, earlier this week I haunted the halls of D.C. renewing friendships and chatting with political types. One of those folks told me the reason stocks are sliding is simple, "It's either the Clinton Crash or the Sanders Swoon since the equity markets do not seem to like those potential candidates or the policies." "That sounds a bit too simplistic given all the world's consternations," I replied, but there you have it. For whatever reason we're now at day 30 of a "selling stampede" I thought might have ended on Tuesday at session 29, with the futures vaulting higher early yesterday morning. The media's causa proxima for the pop was Deutsche Bank's rumored debt buyback plan, which had DB stock better by 13% and its debt securities jumping. The knock-on effect buoyed equity markets around the world. It also elicited this response to Tuesday's Morning Tack titled "Should We Worry" with the tag line "feeling stupid." The email came from my friend Mary Lisanti, portfolio manager for the Lebenthal Lisanti Small Cap Growth Fund (ASCGX/13.85), and read like this (with some edits):
I always think we are close to a bottom when the really smart people start feeling stupid. I have been doing a lot of digging around and one of the interesting things about this market is that the only comparison everyone is making is to 2008-2009 because many of the younger people have not seen any other recession. Explaining to them that that was a "once in a lifetime" situation falls on deaf ears. But the valuation metrics they are using to tell us when stocks are cheap are from that era. The other thing is that now everyone seems to be assuming a recession; increasingly, on earnings calls, the analysts are asking "what about if we have a recession." However, some of the early cycle stocks, like the truckers and the retailers, are starting to stabilize. The trucking stocks are telling us things did not get worse in January, and while the rails are still having issues, their stock prices are going up (see chart in attached document). While we could end up completely upside down, it sounds like we are beginning to see early signs of the end of a period of weakness, not the beginning of a new period of weakness, but then I am always an optimist. I think we will end up with some great buying opportunities before this is over. I am not great at calling bottoms, or the ends of things, but I see a real disconnect between what Wall Street thinks is going on and what the companies are telling us.
So yesterday morning I told two separate groups on conference calls (one retail and one institutional) that the "selling stampede" is "long of tooth" at session 30. However, I have learned the hard way NOT to try to anticipate the end of a stampede. You have to wait until the equity markets can string together at least three consecutive positive sessions, and preferably four, before the stampede is exhausted. And for the record, the longest stampede chronicled in my notes of over 50 years was a "buying stampede" that lasted 61 sessions, and only had one- to three-session pullbacks/pauses, before it was exhausted on the upside. Yet, I can count on one hand the stampedes that have extended for more than 30 sessions. Today is session 31 and this morning the preopening S&P futures are down another 30+ points at 5:30 a.m. as the headlines read: 1) Sweden cuts interest rates deeper into negative territory and steps up currency war, 2) Yellen: Fed not likely to reverse course, 3) North Korea says South pulling out of the industrial zone is a declaration of war, 4) Iran releases videos of one of our captured sailors crying, 5) The Zika virus is spreading, and 6) Top Clinton advisor sent "top secret" messages to her private account. "Clinton Crash" . . . well, that makes about as much sense as everything else. And that, ladies and gentlemen, is why you must exercise patience and wait until the "back" of a selling stampede is broken before getting back in the water.
Jeffrey D. Saut is chief investment strategist at Raymond James.