Investors should prepare for a “second bottom” in the stock market some time during the first half of 2019 – an episode that will throw up “wonderful” buying opportunities, according to fund managers at Carmignac.
The S&P 500 index of blue-chip US companies fell 20% from 3,000 points in mid-September to 2,350 by Christmas Eve. But since then, investors in US stocks have seen a relief rally.
The index currently trades 12% higher at 2,639 as hopes rise that a deal on trade between the US and China will be agreed. David Older, head of equities on the Morningstar Rated Carmignac Patrimoine fund, notes that the forward multiple in January 2018 was a heady 20 times.
In December, it had slipped to 14.5 times before coming back to 15 times today – and that is on earnings that have been revised downwards. “That should be very attractive to us as investors,” says Older.
But caution is urged by both Older and Frederic Leroux, head of portfolio managers at the Paris-based firm. Older thinks the rally we’re seeing today will be short-lived, while Leroux believes we’ll see a second bottom in the coming months.
This opinion could be wrong, of course, Older accepts: “If we get a comprehensive trade deal with China, start to see a lower dollar and earnings surprise to the upside we could really be off to the races. But generally, that doesn’t happen. It usually re-tests the lows.”
From conversations with companies he invests in – and those that have already reported this earnings season – there is a clear slowdown going on across the Atlantic, confirms Older. “I don’t think that is 100% acknowledged by the market. I think there could be some more volatility.”
Are We Due Another Slump?
Leroux gives a more technical reason. Essentially, in the two previous corrections, in 2011 and 2015/16, the S&P 500 saw two significant falls in quick succession. That is also true of a popular technical indicator of markets – the number of companies trading above their 200-day moving average.
This measure averages the closing price of a stock over the prior 200 days and is used by chartist to predict short and long-term movements. Twice in quick succession during both the 2011 and 2015/16 corrections, this measure bottomed.
For example, in late 2015 the percentage of companies trading above this average hit minus 15%. After quickly getting back to positive territory, it again hit 15% in early 2016.
Now, the scale of 2018’s sell-off was more indiscriminate with around 17% of firms trading below their average. Currently, that is back to 5%, but should reach 17% once again.
“It is likely, from a pure technical perspective, that you will see a double bottom where you test the levels you had in December,” says Leroux. “This would create, in my mind, a wonderful opportunity to increase your exposure to the stock market.”
