Around the globe, markets are flirting with the bear. The ASX 200 reached a 20 per cent fall from its peak level this week, which is the official point at which a market correction becomes a rout. The same goes for Britain's FTSE, while the S&P 500 is still off only 12.2 per cent from its high in June and the Nasdaq is down 17 per cent.
So is it all over? The negatives – higher interest rates (eventually) in the US and elsewhere, a slowing Chinese economy - are well known. Less well known, but possibly more important, is that large sovereign wealth funds are selling their winners – internet stocks like Facebook, Amazon, Netflix and Google (collectively known as FANG) – and everything else that has done well to fund redemptions, which can't be covered by oil profits anymore given the collapse in prices.
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Some reining in of market enthusiasm is probably right as the list of negatives above can only hurt. But a bear market?
It is always wrong to get too analytical about what drives markets lower. It's usually the accumulation of a lot of little problems that pile up, making investors feel queasy, so they get out. These sorts of routs have a kind of meandering quality, and can reverse quickly
Another, more scary kind is the one driven by necessity, like when big investors ditch quality companies because they have to in order to meet their liabilities. This is panic selling. And to this commentator, it feels a lot like that, with the sovereign funds behind it.
Think about it. What investor would sell down a company by 20 per cent out of fear that the Chinese economy is slowing? Or that interest rates, low for ten years, would gradually start to rise? Or that the oil price drop has caused some balance sheet issues for a number of countries and companies globally?
Not convinced? Then try this on. What investor wouldn't sell a position down by 20 per cent if the US banking system were on the brink of collapse, Lehman Brothers and Bear Stearns were shutting their doors over the course of a few weeks, and Bank of America, Washington Mutual, Merrill Lynch and even Goldman Sachs were under serious pressure, as happened in 2008? In Australia there was genuine concern that the local banks would have trouble getting access to finance. The US housing market dropped overnight by more than half. Those events were enough to bring on a 56 per cent drop in the S&P 500, from 1557 to 683.
It's all about proportionality, then. We definitely do have a problem with oil losses and their fallout on the world economy. Indeed, as we wrote as far back as December 2014, "markets seem to be suggesting that whatever benefit attaches to falling input costs because of lower oil prices may be offset by write-offs, labour dislocation and loss of earnings for those companies which are somehow part of the oil value chain, and that as these cuts roil individual companies,they will become large and numerous enough to have an effect on the overall economy. More broadly, oil and related industries (such as cars and trucks) account for a significant amount of the workforce, so a change to these industries could create dislocation which feeds into poor economic numbers at the macro level." The aborted Keystone oil pipeline in the US is a case in point.
Throw in interest rates concerns and China, and the bear will saunter in, with an expectant smile on his face.
But will he stay? Having sold hastily, investors are faced with the same old quandary: What to invest in? It's hard to put your faith in energy (except for the bounce, and there's nothing wrong with that). The consumer is recovering slowly, central banks are still accommodative and China, while a problem, will again wriggle its way out because it must. Holding cash at virtually zero return is not an option.
I wouldn't mind betting that in three months' time, this just looks like one large opportunity. Frankly, it all feels a little overdone.
Alex Pollak is chief executive of Loftus Peak, a fund manager that specialises in building listed global portfolios for self-managed super funds.