One of the very most talked-about moments in The Revenant, the bloody and critically acclaimed new adventure flick, is a jarringly violent scene in which Leonardo diCaprio’s character gets up close and personal having a grizzly bear. By most accounts, it’s a high point of movie-making artifice in the Oscar-nominated film, so if you haven’t seen it yet, it’s something to look forward to.
China, and also the damage done: Market intervention gives China’s credibility a significant beating
An earthquake rolled through global markets last week, and its epicentre was in China. Let’s recap, and maybe draw a couple of lessons from it.
On the other hand, Canadian investors might feel it hits a tad too near to home.
Last week in the markets left investors mauled and bloodied, battered and bruised. The S&P/TSX composite ended the week down nearly 400 points, or three per cent. On the year to date, the index is down more than seven per cent, and it is off a lot more than 20 percent from the 52-week high it hit last April.
That’s officially bear market territory.
In these times, it’s natural for investors to consider primarily about survival, much like DiCaprio’s Hugh Glass, who does, obviously, cope with the attack. But how might investors withstand the bear?
Just as with actual life, the investors’ options in the face of an ursine onslaught may look pretty limited. But let’s assess the way the two situations may be similar and which actions might be appropriate.
One of the first things real-life bear experts say you should try to determine is what kind of beast you’re facing. Grizzlies, apparently, behave differently than black bears or polar bears. What works (or might work) against one species might not work against another.
For investors, this may be good advice, too. How you can react to current market conditions usually depends on a precise reading of these conditions. So what type of bear market are we really coping with here? How dangerous could it be?
Let’s consider the causes. The proximate cause appears to be the continuing decline of West Texas intermediate and Brent crude prices, which dipped below US$30 last week. There’s continuing oversupply within the global market, and lots of uncertainty about the impact of Iran and also the lifting of sanctions. So, oil is down about 18 per cent around the year, and the resource-heavy TSX is down, too.
So we’re dealing with an oil bear here, clearly. Other difficulties pale by comparison. Reading China and it is roller-coaster markets is difficult to read meaningfully anyway. The threat of the recession in Canada may appear a sharper worry, but those concerns are largely driven by oil anxiety, so it’s really the same issue phrased differently.
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For investors, this might suggest a couple paths. The first is to overlook the market fluctuations and just wait for the cost of oil to rebound. Another is to look for opportunities inside a selloff that might be too broad-based. If what we have finally is a fear trade, then that implies other sectors C financials and consumer discretionaries C may be getting oversold.
OK, so let’s return to bears from the furry kind. You’ve determined what sort of bear it is, also it charges. What else could you do?
One option, though from what I will easily notice not recommended, is to run your butt off in the other direction. The truth is, bears are pretty quick, and chances are they’ll run faster than you.
For investors, this is like selling everything and getting as far away in the markets as you possibly can. But in the long run, this might be a losing strategy. Equity markets, unlike bears, tend to help increase your money over time, and when you get out, another kind of ravenous predator C inflation C will consume your portfolio with time.
In actual life, professionals seem to agree that it’s still important to (gently) keep just as much distance between yourself and the bear as possible. Distance is your friend.
For investors, the corollary might be a little money from the table to hedge your risk. Clearly, there was lots of that happening a week ago. But when you do it strategically, taking profits (for those who have any) and keeping the powder dry, that might at least buy you a chance to decide your next step.
One tempting response to escape from a genuine bear is to climb a tree. An investing corollary may be the so-called “flight to quality,” which we had a week ago as investors fled to gold and bonds.
In actual life, the problem with this tactic is many bears can and do climb trees. In investing, too, safety is also relative. If rates of interest rise, heavy bond exposure will not likely do investors many favours. Gold, meanwhile, has shown itself remarkably volatile recently.
Yet another real-life option in a bear attack is to play dead. Apparently, this may only work with some types of bears. It can be the same in investing. If you are convinced that this bear market is driven only by oil’s swoon, which one day the forces that are keeping prices down (high production from Saudi Arabia yet others, low global growth) will recede, then it might make sense to simply wait out this recent attack. Eventually, the bear might just walk away.
Then you have the riskiest option: fighting back. In the bear world, this is mostly considered a last-ditch effort, as it reveals the real chance of just pissing off your adversary even more. But here’s where markets and real life diverge, because all a trader has to do to fight back is to find into the bear C which probably won’t kill him.
With so much fear out there at this time, this would take some courage, and nobody wants to catch a falling knife. But at a certain point, the valuations of Canadian equities will start to look attractive. And long term, they’ve several things opting for them.
The U.S. recovery appears to be on firm footing. Our plunging loonie will help manufacturers, eventually. Low energy costs are good for consumers within the short run. As well as in the long run, the world will still needs lot of oil, and Canada has lots of it. We are able to get hung up on low economic growth and worries about recession, but stock markets happen to be through low-growth periods before and performed very well, thanks.
Look, bear markets hurt. But don’t forget that they have never lasted forever, and this one won’t either. Fleeing isn’t the only possible response. And also to survive this bear attack within the minimum number of pieces (“one” being the goal), it could pay to maintain your options open.