There’s been a lot of discussion about bear markets in recent days. With the FTSE 100 index closing on 20 January 2016 more than 20% lower than the all-time high it reached on 27 April 2015, it was indeed ‘technically’ in bear market territory for a day but has since rallied clear of that level for now.
It’s not exactly clear why 20% has been chosen as the point at which a ‘correction’ becomes a ‘bear market’. Nor is it clear exactly what has triggered the recent market reassessment but, even with the benefit of retrospect, it rarely is clear! China, oil, and the Federal Reserve’s recent interest rate increase look the most plausible explanations but valuation will have played a role too – some parts of the market have been defying gravity for a while. Regardless, it has been a rather grim start to the year for equity investors.
Although the UK stock market as a whole is not in a bear market currently, many individual UK stocks still are. We’ve had a look at some of the data for the FTSE All Share index as at close of business yesterday and, in actual fact, going by the arbitrary definition, even after the recent rally, over 40% of FTSE All Share Index stocks are still in bear market territory, having fallen more than 20% from their 52 week highs (see graphic below). Over a quarter of FTSE All Share index stocks are down more than 20% since 27 April 2015.
By contrast, it’s worth remembering that some stocks can rise in value even in a bear market. The average stock is -21.1% below its 52-week high but more than a quarter of index stocks have actually risen in value since the market’s peak.
This is an important reminder of the need to be selective. As active fund managers, our funds bear little resemblance to the index and often behave very differently to it too.
Regular readers will be aware that we have been cautious on the world economy for some time and our portfolios have been built with this in mind.
Market sell-offs such as the one we have witnessed at the start of this year, however, tend to be indiscriminate. Whilst this can be frustrating in the short term, it can also provide opportunity. As such, when shares get cheaper without fundamental justification, our confidence in the funds’ long-term return potential actually increases! As Warren Buffett once said, “be greedy when others are fearful”…