For equity markets, this was the worst December since 2007. International benchmarks as well as domestic large-cap and small-cap indexes all posted losses. We have not seen such widespread December losses in seven years. Yet somehow, with the holiday fanfare and the endless political news, stock market returns did not garner big headlines.
That all changed very quickly as we entered 2016. Chinese stocks nosedived -7% on January 4th, the first day of trading and triggered “circuit breakers” to halt trading for the day. Just three days later, another -7% drop shut down the Chinese market only a half-hour after it opened. According to the Wall Street Journal, this was “the shortest trading day in the market’s 25-year history.”1 The ripple-effects have been huge. The large-cap S&P 500 Index fell -5% for the week. Oil traded down roughly -13% over five days. And, true to form, gold served as the “fear trade,” jumping +3% in the first week of the year.
With so many headlines, big market moves and breathless commentary in print and on television, there is a certain stereotype about investment professionals. Depictions have us all in a very large room, screaming and shouting, visibly angry or frustrated or upset—and occasionally sweating profusely or crying in agony. The conventional depiction is noisy, chaotic and emotional.
At Ariel, the halls have been quiet, as they typically are. Our research people are not obsessing over macroeconomic numbers, nor are they spewing sell orders. For the most part, they are in their offices, assessing a growing number of investment opportunities and crunching numbers. If anything, the mood and activity is calmer and more measured now than usual. It may seem counterintuitive, but it is easy to explain.
As long-term investors, we know markets sometimes slide, fall or plummet. We strive to be fully prepared for downdrafts. Having witnessed plenty of corrections, bear markets, and even some crashes over the last three decades, we know weeks such as the past one generally provide opportunities. As such, we calmly and rationally focus on the fundamentals of stocks that are dislocating. We do not become knee-jerk buyers who snap up whichever stocks fall the most. The 2007-2009 Great Financial Crisis was a wonderful reminder to value investors that the bargains may well get better even if they are already good.
So in early January, we have been putting cash to work at a measured pace. In those portfolios where we have kept some “dry powder,” we have been opportunistically buying shares of existing holdings. In some cases, we have been concentrating on what is cheap— companies we know well and whose shares have fallen more than they should have according to our financial models. In other portfolios, we have focused on buying those companies in which we have great confidence but whose shares have not been extremely cheap (until recently). In portfolios where we have not had stashes of cash, we have been trimming our better performers and re-deploying those assets back into cheaper stocks at smaller weightings.
Nobody knows what this week of broad losses will become. It could devolve into a full-fledged bear market or it might simply represent a pause during a long stock rally. Either way, we will continue to fixate on fundamentals, assess valuations on specific companies and ignore the noise based upon our strong belief that the long-term direction will be up.
The opinions expressed are current as of the date of this commentary but are subject to change. The details offered in this commentary do not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
1 Chao Deng, “China Trading Halts for the Day, Asian Markets Slide,” The Wall Street Journal, January 7, 2016.
Past performance does not guarantee future results. Investing in equity stocks is more risky and subject to the volatility of the markets. Investing in micro-, small- and mid-size companies is more risky and more volatile than investing in large companies. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, and foreign currencies and taxes. The use of currency derivatives and exchange- traded funds (ETFs) may increase investment losses and expenses and create more volatility. Investments in emerging markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price.
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