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As financial markets plunged this week, the bears were quick to seize the spotlight. (Mark Lennihan/AP)
As financial markets plunged this week, the bears were quick to seize the spotlight. (Mark Lennihan/AP)

investor clinic

‘Sell everything’ and other bad ideas to avoid Add to ...

As financial markets plunged this week, the bears were quick to seize the spotlight.

“This looks very much like 2008,” warned Andrew Roberts, head of European economics at Royal Bank of Scotland. His questionable advice? “Sell everything except high-quality bonds.”

If that didn’t scare people sufficiently, he added this dire prediction: “Automation [is] on its way to destroy 30 to 50 per cent of all jobs in developed world.”

Mr. Roberts wasn’t the only market strategist forecasting severe pain ahead. Citing the strong U.S. dollar, Morgan Stanley warned that crude oil could fall to $20 (U.S.) a barrel. In Canada, Macquarie Capital Markets predicted that the loonie will tumble to a record low of 59 cents by the end of 2016 – and stay down for the next couple of years.

Is it possible that stocks, commodities and the Canadian dollar – all of which were pummelled mercilessly on Friday – will extend their losses in coming days? Absolutely. But is it time to start stockpiling dehydrated food and build a cabin in the woods? Emphatically, no.

As the gloomy predictions were piling up, a few level-headed commentators offered a more sober assessment of the market turmoil. Murray Leith, director of investment research at Odlum Brown in Vancouver, pointed out that the media – and investor psychology – tend to take over from fundamentals when markets get to extremes.

“During the good times, it’s the most optimistic prognosticators that get all the media coverage,” Mr. Leith said in a note. He cited former CIBC World Markets chief economist Jeff Rubin, who in 2008 predicted that oil would soar to $200 a barrel from $140 at the time.

“It turned out to be top-of-market talk. Now that the momentum has changed direction, it’s the pessimists that are grabbing the headlines.”

While Mr. Leith conceded that the global economy has its challenges, he said investors are overreacting because their emotions are now calling the shots. Whenever markets are rising or falling sharply, it’s human nature to come up with theories to explain why the prevailing trend will continue, and this time is no different, he said.

“History teaches us that investors tend to get carried away buying when markets are high and rising, and selling when securities are depressed and falling,” he said.

There are reasons to believe that the global economy will avert a recession, he said. The U.S. economy remains strong, monetary policy is supportive and energy prices are low. What’s more, many businesses are thriving: Even as markets were plummeting this week, General Motors lifted its 2016 earnings guidance, raised its dividend and boosted its stock buyback program – hardly the actions of a company that fears a global meltdown.

In Canada, depressed commodity prices, high consumer debt and a “frothy” housing market are certainly sources of worry, but the low Canadian dollar and the strength of the U.S. economy suggest Canada will also avoid a “nasty recession. Sluggish growth is more likely,” Mr. Leith said.

His wasn’t the only voice urging investors not to cave in to the doom-and-gloom predictions. Howard Marks, co-chairman of U.S. alternative investment firm Oaktree Capital Management – who counts Warren Buffett among his fans – said a hard landing in China “certainly could have far-reaching effects,” but “the bottom line for me is that a rerun of the global financial crisis isn’t in the cards.” He cited several reasons that a 2008-style meltdown is unlikely.

First, the economy and the stock market haven’t experienced a boom, so there probably won’t be a bust.

Second, leverage in the private sector has been reduced, particularly among the banks, where it has dropped dramatically.

“Finally, the main villain in the crisis was subprime mortgage-backed securities [MBS]. The raw material – the underlying mortgages – was unsound and often fraudulent. The structured mortgage vehicles were highly levered and absurdly highly rated. And the risky tranches ended up in banks’ portfolios, causing them to require rescues,” Mr. Marks said in a memo.

“Importantly, this time around I see no analog to subprime mortgages and MBS in terms of their combination of fragility and magnitude.”

Is everything hunky dory? No. But the stock market knows that, and it has already plunged to reflect the lowered expectations. The mistake many investors make is assuming that, if things are bad now, they have to get much, much worse.

Sell everything? No thanks. If this keeps up, the panic-stricken will soon be throwing away perfectly good stocks at ridiculously low prices, and that’s when smart investors will want to be buying, not selling indiscriminately.

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Follow on Twitter: @johnheinzl

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