Thoughts from our recent conversation with ECU Group's Chief Technical Strategist Robin Griffiths, which can be listened to on the Newshour podcast page here or on iTunes here.
When looking at the performance of all major stock market indices around the globe, “we are in a bear market now,” Robin Griffiths told listeners Saturday.
“The only two equity indices in the world capable of making a new high this year or next are the Dow and the S&P 500,” he said.
In order to change his view that the US is also in a bear market, US stocks would need to breakout to new highs and then form a higher low above the May 2015 peak.
Don’t Fear a Crash
Many investors are quite gloomy about the outlook for stocks and worry a major crash is in the offing.
Given its traditional safe-haven status in time of trouble, speculators, for example, have now pushed their bullish bets on gold to the highest level in twenty years.
Griffiths, however, does not think a stock market crash is the most likely scenario, but that we may just see instead a “prolonged period of low growth” and “very modest returns.”
Here’s what he had to say:
"I don't think we need to fear a crash in the US stock market…[and] I don't think that the US economy is going to go into depression or recession. Again, there are possibilities for that to happen but on our work it looks as though it will simply go into quite a prolonged period of low growth. I guess you could call it sub-par growth but it is nonetheless growth. Somewhere between 1-2%—the exact number is not particularly important—the important thing is it's unlikely to be between 2.5-3.5%. And there's nothing wrong with that but history shows as long as you don't overpay for the earnings per share that you're getting in that period, you can still do okay with good individual stock selection. But the index itself doesn't do anything terribly exciting so that the total returns you can expect are modest—very modest."
Bear Market Rally
After reaching multi-decade lows earlier this year, oil and commodities have rallied strongly, helping to relieve concerns related to large commodity-exporting countries and spillover effects in the junk debt market.
According to Griffiths, based on his outlook for sub-par growth, the large rally in commodities is not the result of improving fundamentals, but largely a technically-driven bear market rally, which, he said, is quite normal after a significant correction:
“In the case of oil and all other commodities, I see that the rally they've had has been a bear market rally. And believe it or not, when you look back at history how big can bear market rallies be? In really cataclysmic bear markets you can get rallies of 50-100% and they're not only not exceptional, they're also normal. So, bearing in mind that oil went to $26/barrel, it's allowed to go up to $52 before the rally dies...but after that I do expect it to come back down again into the area where it made the base. So, I would expect it to drop back again from the $50-52 area down into the $26-30 area and spend probably quite a long time making a base at that level.”
Modest Returns
Overall, Griffiths told listeners not to expect the same type of returns they’ve been getting from the market in decades past.
“I think we’re in an era where a good return is going to be a much more modest number than we’re accustomed to,” he said.
Currently, Griffiths thinks the stock market is overvalued and vulnerable to a correction in the near-term, but suggested investors consider earning their return from dividends rather than strong growth or capital appreciation.
Listen to this full interview with Robin Griffiths by clicking here. Want to listen to "The BEST financial podcast on the web!" 3 days a week? Click here to subscribe
