It has been quite some time since my last post and a lot has happened since. As it turned out, the oil sector went into a bear market. Although I wasn't sure of it in December, I knew this was decent possibility and so I avoided the sector entirely. I was able to sell the remaining small portion I had in hwo at 4.25 back in May which brought my portfolio to 80% cash. I have small holdings in fom, czx, nsu and nus which are all great prospects that are being trumped right now by weak commodity prices and sentiment. Given the carnage in the resource sector, it seems to me a generational buying opportunity is in store in the not too distance future.
So now the big question is, are we in general bear market with equities with this latest rout? It doesn't appear to me that this is the case. It seems more like this is just a correction, albeit a severe one like in 2011. The classic conditions for a bull market peak were simply not met i.e. tight money and greed. Instead this looks more like a case where the market is correcting itself after a torrid run since the lows in 2011. Remember back then the market dropped 20% from the high but the bull market carried on. This feels a lot like that. Yes, China is important but the US is more so and the US is the boss, as it it makes up 25% of world GDP. All major global downturns like 2008 and 2001 were led by weakness starting in the US, not China, not Europe. I will of course keep an open mind but I'm skeptical at this point that we're in the beginning stages of a big bear market.
There is however one thing that does worry me and it's not China. It's the oil market. A lot of the jobs that were created during the recovery since 2009 were oil related. There's also a significant presence of oil companies in the high yield bond market. Energy was a leading sector and so it's quite possible that the implosion in this sector could result in material negative feedback loop within the US economy leading to a recession much how tech did in the early 2000's and housing did in the late 2000's both of which were leading sectors during their respective cycles. In Canada we're already technically in recession due to the energy sector which is a more significant component of the economy vs the US, however it seems to be isolated to that sector and not widespread....at least not yet.
It's going to be interesting to see how things play out. Given the negative sentiment in place now, I think at the very least there will be an intermediate term rally beginning anytime between now and late October (with a good chance of one more downside scare before it starts). After that I'm not sure but for now I'm giving the benefit of the doubt to the bulls. I'm going to remain heavy in cash until I see a good set up.
By the way, my bet is that the fed doesn't hike rates this week. I think the memories of 2008 are still fresh and that they've come to believe that when there's doubt you should be remain accommodating and there's clearly a lot of doubt/uncertainty out there with the global economy and inflation pressures are absent. I think the fed is not stupid and they know that the implication of a rate hike and therefore stronger US dollar could create further turmoil across the globe would could eventually harm the US even though as of now the harm to the US has not been material. Yes, the US is still the global boss but they it's a global economy and they won't be completely immune to the problems of the rest of world forever.
