This Is a Classic Correction, Not a Bear Market, Russia Aside
(Allie Joseph/New York Stock Exchange via AP)
This Is a Classic Correction, Not a Bear Market, Russia Aside
(Allie Joseph/New York Stock Exchange via AP)
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What now? January’s drop bled right into February, with stocks’ slide into “correction” territory igniting fears the post-lockdown bull market is dead. Lingering supply chain snarls, $100 oil, Russia and Ukraine, the Fed lurching toward hiking—it’s all transfixing investors. Don’t fret. View past the fretful haze, smoke, haunted house freights and mirrors to see economic, political and sentiment drivers pointing up. This bull market is alive—it will bounce back.

Early 2022’s volatility doesn’t act like a bear market starting. They usually creep slowly, 2020’s lockdown-driven swoon aside—beginning with a whimper, not a bang. Sucking in more suckers. This correction began with an 18-day, -9.7% plunge off January 3’s high—a bang. Bear markets begin two ways: Either euphoric investors’ lofty expectations make any setback a shock. Or a multi-trillion-dollar negative wallop hits, surprising everyone.

Neither is now. Does anyone really think investors are euphoric? Only a wacko!! There is more talk of a lofty “Misery Index” than lofty expectations. Strikingly different, euphoria was emerging early last year—special-purpose acquisition company SPAC-ulation and non-fungible token (NFT) nuttiness reigned. But poofed fast.

I covered Ukraine, inflation and the Fed hiking rates—earlier this month and last: There are real negative aspects among those concerns, of course. War is tragic. Hot inflation can be problematic. But, perversely, these fears are bullish for stocks. Surprises move markets most, and worries make positive surprise more likely.

It took no time for Russia’s horrid invasion to be extrapolated through hyperventilating and sometimes, seemingly, salivating media to contemplate this being the beginning of China invading Taiwan, Iran attacking Israel (heaven help Iran), and more.  I’ve gotten lots of emails with those fears. That’s correction psychology.  Yes, war in Europe is a first since World War II.  But every correction is phrased in versions of “this time is different”, worse, unique, unprecedented and explosive one way or the other, or multiple ways.

This is no different as it relates to markets. Regional wars don’t cause bear markets.  We’ve had lots of them in lots of realms.  This one just happens to be Europe’s first in recent history.  Ukraine isn’t in NATO.  This will not become what most fear, beyond regional. The outcomes  here must be far worse than current fears, which are in the marketplace and have been, to create a bear market. Russia invading a NATO country or China invading Taiwan would hurt both invaders far more than help them.  Stupid they may be, but not that stupid (although I’ve seen no sign China is stupid--I believe Putin is for invading Ukraine).

Mr. Putin just put every western nation on formal permanent notice that he can’t be trusted….for anything he says or does.  With an economy smaller than New York’s, but relatively poor and backward, fully dependent on commoditized exports—what he just did can only hurt Russia’s future. Only.  

Our central banks?   Well, back to Russia, does its actions make the FED more likely to hike rates more soon or less soon…and, maybe later?  But behind Fed tightening fears, a hidden reality lurks: The global economy doesn’t need Fed “help.” Q4 US GDP boomed 6.9% annualized. The eurozone grew 1.2% annualized despite significant Omicron restrictions—which are fading now. Even China—amid stringent “zero-COVID” measures and its widely watched real estate troubles—grew. Looking ahead, leading economic indexes for the US, eurozone and China point to growth. Services and manufacturing Purchasing Managers Indexes also heavily hint at expansion. The IMF’s 4.4% global GDP growth 2022 forecast met with investors griping about it slowing from 2021’s bounce-back 5.9%. Dismissing healthy growth? That’s bullish!

While headlines focus on nosebleed inflation, many dismiss signs their underlying cause—supply chain snarls—are abating. February’s IHS Markit purchasing managers’ survey found US component and staff shortages both improved. Its eurozone survey found rates of supplier delivery delays were the lowest since January 2021, thanks to easing supply chain chaos—an improved fact you read nothing of. 

Industry bellwethers also show supply chain backdrops normalizing. Shipping giant A.P. Moeller-Maersk A.S. is trying to lock in long-term contracts at fixed rates. Why? It sees easing container capacity constraints reducing shipping costs ahead. Triton International—the world’s largest intermodal container lessor—sees container supply better keeping up with demand, with costs already 10% off highs. Mercedes-Benz expects chip shortages—which wreaked auto industry havoc—to ease in 2022’s back half. Volkswagen agrees. None of this means hot inflation abates immediately—not with many raw materials contracts already locked in. But it suggests the expiration date is sooner than most envision. 

Politics? This year began with uncertainty high. But it falls soon—buoying stocks. November’s midterms should bring hardcore gridlock, blocking big new laws. Try to find big controversial bills in the third year of presidents’ terms. Good luck. Markets pre-price that in the back half of the midterm year.

In early January I told you Congressional redistricting would make campaigning extra shrill this year, likely weighing on markets early. That is playing out, with Republicans and Democrats redrawing districts to protect incumbents. Some analyses project final tallies totaling half as many swing seats as a decade ago. With stronger potential challenges from within their own ranks than the opposition, most incumbents will cater to their bases—eschewing moderation and shrieking fringe rhetoric that rattles investors short term. But shrillness won’t sway stocks for long. Remember: Stocks typically grind early in midterm years, but boom later, starting at some perfectly unpredictable point—and finish in a positivity party. Stocks have climbed in 83% of midterm Q4s, as election clarity brings relief. This fall they will soar again.

Few see or believe this backdrop—which makes me more bullish. Bank of America’s February Fund Manager Survey showed investors slashed their equity weights and upped cash holdings. They cut Tech allocations to a 15-year low—favoring value over growth at the highest level on record. Nearly a third now expect a 2022 bear market. Most expect GDP to weaken. The American Association of Individual Investors’ weekly sentiment survey, meanwhile, showed just 19.2% of respondents were bullish in the week ending February 16—among the 30 lowest readings in its 35-year history. Over 43% were bearish, well above the 30.5% historical average. Investors are extrapolating recent trends that won’t last. Love it—investing wise—because it’s wise investing

Don’t let today’s rampant negativity drag you down. As Warren Buffett famously put it, “The stock market is a device for transferring money from the impatient to the patient.” I hope you land on the right side of that.  This is a classic correction and stocks will be higher for it ahead.  I don’t know how high, how soon, but corrections are always rewarding to the patient.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here

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