This is the position of current bulls.....
Opinion: Now's the time to step up and buy stocks
Michael Brush debunks the six reasons investors are using to justify the selloff in 2016
Paul Morigi/Getty Images What's wrong with stocks? Is it time to sell everything and dive under the desk?
My take: This is just normal volatility that you're going to have to get used to in 2016. Don't sell everything and run for cover.
Here's why:
- Sentiment has turned negative, which is a positive in the contrarian sense.
- Insiders have turned more bullish.
- We are not moving into a recession, so this is not the start of a bear market.
The upshot is, if you have cash or margin capacity, now is the time to buy. Otherwise, don't panic and sell.
I suggest three stocks, below, that look particularly interesting based on recent insider buying.
First, let's consider six reasons behind the current weakness, and reality checks that tell us why these "problems" aren't anything to get upset about.
Reason 1: Many investors put off planned sales until the start of the year to delay taxes.
The managed mutual funds I own dumped enormous capital gains on me last year. That happened, in part, because everyone knows that sectors and stocks behave very differently in a Fed rate-hike environment. So investors are finally selling lots of their long-term winners to raise cash to reposition for the new market.
Opting to postpone the tax headaches, many sellers waited until the first days of the new year, a maneuver that was fairly common during the tech bubble.
Reality check: If I am right about this, it means the current bout of weakness caused by postponed selling should soon abate.
Reason 2: The market has gotten hit with an unusually large number of scary headlines.
The gloom kicked off with reported manufacturing weakness in China, and a Here's why everyone needs to care about China's stock market. Then there was news of a purported hydrogen bomb test in North Korea. That was followed by comments from George Soros suggesting we are about to go through 2008 all over again, among other gloomy headlines.
Reality check: Evidence of a slowdown in growth in China is nothing new. The numbers were not even that bad. Just a shade lower. And, besides, China's non-manufacturing indicators remain strong, which is a positive. It suggests China is successfully transitioning toward services from manufacturing, says Ed Yardeni of Yardeni Research.
What about China's stock market selloff? China's market is too small for selloffs to create a negative wealth effect. And its moves don't reflect economic trends. Recent sellers may have been getting out ahead of an anticipated end to the ban on some kinds of stock selling. Not a big deal, for us.
Next, does anyone really believe what comes out of North Korea? As for Soros, the world may be awash in debt, and this may or may not ultimately be a problem. But, sorry George, the current situation bears little resemblance to the housing bubble and related fraud that happened during 2005-2008.
Reason 3: History shows the stock market typically goes through a bout of weakness after the first Fed rate hike.
So the weakness in stocks since the Dec. 16 Fed rate hike is no surprise.
Reality check: But history also tells us this weakness wears off and stocks move higher. According to research by Credit Suisse, after the past four reversals in Fed policy (into rate-hike mode), the market dropped by an average of 7.2%, and anywhere from 2% to 11%. Then stocks went on to recover those losses within six to nine months. Stocks posted 2.2% gains, on average, six months after the first rate hike.
True, the 2007-2009 financial crisis and the Fed response were so unusual, history might not be a great guide. On the other hand, the arc of Fed rate hikes from here will be gradual, given the fragility of the economy. If so, this will be a positive for stocks in that the punch bowl will be taken away more slowly than normal, yet investors are selling now as if there will be a normal bout of Fed rate hikes ahead.
Blackstone investment strategist Byron Wien doubts that will be the case. He expects few or no Fed increases this year. Citing the sluggish economy, he questions the aggressive 2016 rate hike scenarios recently laid out by a few Fed officials in recent speeches that grabbed headlines — another factor hitting stocks. Yardeni describes their aggressive rate-hike forecasts as delusional. "This scenario just doesn't make much sense to us," says Yardeni.
Reason 4: Stocks are fully valued, even after last year's weakness.
Stocks recently traded with a trailing price-to-earnings ratio (P/E) of about 18-19. Historically, stock markets rarely spend much time above that level. Investors know this, which makes it tough for them to get bullish about buying stocks, especially given all the other doubts circulating.
Reality check: While this means some stock weakness is to be expected, it does not mean that the weakness is a reason to panic and sell. Again, bear markets are mainly caused by recessions, and I don't think a recession is around the corner.
Reason 5: We are entering a new phase of heightened volatility in the market.
One of the reasons I was cautious about the markets in my stock letter, Brush Up on Stocks, last April-August was the eerie calm in the markets at the time. It was just more evidence of the dangerously excessive complacency among investors.
Reality check: Now, many strategists I respect because they have a history of making good market calls predict we will see a lot more volatility in 2016. In short, consider the first week of trading to be your welcome to the new year. It's going to be more of a trader's market. Sell a portion of positions in strength. Keep some cash on hand to buy pullbacks — like the current one.
Reason 6: Oil and commodities have been weak.
This has investors worried that the global economy is so weak, we may be moving into a global recession.
Reality check: Governments in Europe and many emerging markets are stoking their economies with stimulus, or they have room to apply more. This will kick in at some point and spur more growth. The growth will bid up the prices of commodities and oil, predicts Jim Paulsen, a strategist and economist at Wells Capital Management. It will also attract investment funds to these regions, which will weaken the dollar by bidding up foreign currencies. A weaker dollar typically drives up commodity prices, since the two have an inverse relationship.
The bottom line
The key thing to do here as an investor is to ignore the scary headlines and worries about Fed rate hikes and weak commodity prices, and focus on the three most important factors telling us this is more of a time to buy or simply ride it out, rather than sell.
- . Sentiment has gotten quite negative by the measures I track, which is a bullish contrarian signal. The Investors Intelligence Bull/Bear Ratio recently fell to a three-month low of 1.10. I consider anything below 2 to be a "buy" signal. Two Ned Davis Research sentiment indicators recently moved to excessive pessimism.
- . Insiders have turned more bullish, according to a bull-bear ratio tracked by Vickers Insider Weekly. This combination of bearish investors and bullish insiders often signals a great time to buy.
- . We are not going into a recession, predicts Paulsen. So the current weakness is not the start of a prolonged bear market. Paulsen cites reasonably strong jobs and wage growth and solid consumer confidence and balance sheets, among other factors.
We may need to see the typical big morning selloff on large volume that clears the bears, but even now it seems like a favorable time to buy.
Three of my favorite stocks because of insider buying in the current weakness are: Berkshire Hathaway Inc. BRK.B, -0.89% which trades near the 1.2-1.3 times book value that Warren Buffett has informally described as a floor in the stock where he would buy; Cheniere Energy Inc. LNG, +0.11% where activist investor Carl Icahn is gunning for changes that he thinks will move the stock higher; and Jernigan Capital Inc. JCAP, -2.33% a storage company where CEO and founder Dean Jernigan, who has extensive experience in this business, has recently been a big buyer.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested BRK.B, LNG and JCAP in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
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