The bear market of 2008 continues as the S&P 500 lost more than 6% last week. The market has declined in six of the last eight weeks, with some weeks seeing substantial losses. So, it should come as no surprise that the price-to-peak earnings multiple dropped to 9.8x this week, its lowest level in years. Compelling stock values have been uncovered in the market’s meltdown as it now appears to be pricing in the possibility of a deep and long recession. In a year that has seen the stock market tumble more than 40%, it has to make you chuckle when CNBC commentators have nothing else to blame for another down day than the market’s “further pricing in of a looming recession”. When I heard the commentator utter those words with no new data to support them, it underlined for me that reason and logic are absent from much of the market’s recent activity. Instead, right now the market is dominated by fear and uncertainty about what lies ahead. Short term market movements are completely unpredictable and swing wildly (witness the 1000 point swing in the Dow on Thursday), and although there is an abundance of stocks that will ultimately be proven undervalued, it is still a time to invest with caution.
The percentage of NYSE stocks selling above their 30-week moving average has fallen to just 3%. Anything below 10% is considered an extremely rare bullish indicator and the market has been below this threshold for the last six weeks. We continue to view this positively as an investor should always be wary when a clear consensus forms around anything, especially sentiment. The wretched October certainly gave even the most optimistic of investors pause, but investors must not let the past cloud their investment decisions going forward. Whenever the stock market has both historically low sentiment readings and historically low valuations, value investors should be excited about the opportunities that exist in the market and have the discipline to stomach whatever short-term pain might accompany investing into oversold markets. The Wall Street Journal ran an editorial by John Cochrane, professor of finance at the University of Chicago’s Booth School of Business, who described an investor’s circumstance this way:
“If you’re less leveraged, less affected by recessions, and have a longer horizon than the average, it makes sense to buy. If you’re more leveraged, more affected by recession or have a shorter horizon, it might be the time to sell, even though you might be cashing out at the bottom. If you’re about the same as everyone else, do nothing and relax. If you’re wrong, at least you will have excellent company.”
Of course, Mr. Cochrane makes the simple yet inarguable point that an investor must truly understand his or her own circumstances, goals, and time horizon before investing. We at Ockham Research take the view of a long-term, value investor because that is our research methodology. No one knows where or when the market will bottom or what it will do in the mean time, but right now expected returns for those investing for the long-term appear quite attractive. This is a time to be cautiously nibbling at the market, picking up stocks that have been unjustly pushed down in the negative broader market movements. We currently rate 87% of the 5500 securities we cover as Undervalued because we believe that the market is oversold and through the course of time many of these stocks will sell for much more than the current share price. Our asset allocation model suggests an above average exposure to the equity markets for our value-investing readers.