Shaoul Senses Panic as Stock Selloff Most in Two Years

By Joseph Ciolli, Callie Bost and Oliver Renick

Photographer: Michael Nagle/Bloomberg

Michael Shaoul, Chief Executive Officer of Marketfield Asset Management.

U.S. equity losses that now surpass every market retreat since 2012 are getting worse even as the economy shows signs of accelerating and earnings rise. To Michael Shaoul, those are hallmarks of a “growth panic.”
The Standard & Poor’s 500 Index yesterday tumbled to the lowest level since May as airlines sank on Ebola concerns and energy shares plunged as Brent crude dropped to the lowest in almost four years. At 6.8 percent, the decline that began 17 days ago now eclipses three earlier retreats this year and is the biggest since equities plunged 7.4 percent starting in October 2012.
Shaoul, who predicted speedy ends to bull
market interruptions that started in February and August, said this selloff is different and it’s impossible to say where it will stop. That the economy may grow 3 percent next year as earnings climb and unemployment falls probably won’t matter to investors coming to grips with swelling losses in individual stocks.
“You have to pretend as if there’s a real problem in times like this, even if you think the analysis is pretty poor,” Shaoul, the New York-based chairman of Marketfield Asset Management LLC, which oversees about $18.5 billion, said in a phone interview. “I call it a growth panic because I don’t actually think there’s anything wrong.”

Airlines Tumble

Halliburton Co., Dow Chemical Co. and Merck & Co. lost at least 4.3 percent yesterday to pace declines in energy, commodity and health-care companies. Spirit Airlines Inc., United Continental Holdings Inc. and American Airlines Group Inc. sank more than 7 percent as the Bloomberg U.S. Airlines Index extended its loss since Sept. 2 to 22 percent.
The S&P 500 slid 1.7 percent to 1,874.74, falling below its average from the past 200 days for the first time in two years. The index extended its three-day drop to 4.8 percent and closed at the lowest since May 20. The Dow Jones Industrial Average sank 223.03 points to 16,321.07. The Nasdaq Composite Index tumbled 1.5 percent and the Russell 2000 Index (RTY) lost 0.4 percent.
S&P 500 futures expiring in December were little changed at 10:04 a.m. in London. Russell 2000 contracts added 0.7 percent.
Anyone looking at the S&P 500 or Dow average is getting an incomplete picture, Shaoul said. Companies from Amazon.com Inc. to Gap Inc. and Ford Motor Co. (F) have fallen more than 20 percent from their highest share price in the last year and about 120 stocks in the S&P 500 are in bear markets, data compiled by Bloomberg show.

VIX Surges

The Dow Jones Transportation Average (TRAN) slumped 2.2 percent yesterday, its fifth decline of 2 percent or more in the last nine days, while small caps measured by the Russell 2000 Index are down 13 percent since March. The Chicago Board Options Exchange Volatility Index jumped 16 percent yesterday to 24.64, the highest level since June 2012.
October is historically one of the market’s most volatile months and saw the VIX surpass 80 for the first time ever in 2008 after the collapse of Lehman Brothers Holdings Inc. About a quarter of all market crashes have occurred in October, according to Thomas Lee, the co-founder of Fundstrat Global Advisors LLC.
Shaoul pointed to a 10.8 percent decline that lasted for 14 days in October 1997, pushing the S&P 500 from 983.12 to 876.99. The stretch included a 554-point plunge in the Dow average on Oct. 27, about 7.2 percent at the time, as investors speculated slumping Asian economies would hamper U.S. exporters. The S&P 500 finished the year up 31 percent, part of a five-year stretch in which annual gains averaged 26 percent.

Ugly Markets

“1997 is a very good reminder of how ugly markets can get in the middle of a perfectly good economic cycle,” Shaoul said. “Everybody convinced themselves that the collapse of Southeast Asian economies were directly relevant to the U.S. economy. It wasn’t, but it didn’t matter much as far as the market is concerned. It has that kind of feel to it.”
While October has seen elevated volatility in the past, November is when companies increase share buybacks, and that will limit losses in the stock market, according to a note yesterday from strategists including Amanda Sneider and David Kostin at Goldman Sachs Group Inc.
About 8 percent of annual repurchases happen in October, compared with 14 percent in November, the biggest month of the year, and 10 percent in December, according to data from Goldman Sachs from 2007 to 2013, excluding 2008. The strategists noted that most companies stop buying back shares in the five weeks before reporting quarterly results.

Big Question

About 70 percent of companies in the S&P 500 (SPX) will report earnings from now to the end of the month. Analysts estimate that S&P 500 companies will post income growth of 4.8 percent and sales increases of 4.2 percent for the third quarter, according to data compiled by Bloomberg.
“Sentiment is clearly pretty negative and what could change that is the start of getting into earnings,” Ed Hyland, an Atlanta-based global investment specialist at JP Morgan Private Bank, said by phone. The firm oversees about $1 trillion. “The big question will be what kind of outlook management is setting for Q4 and 2015 and we think we’ll continue to see earnings that are strong.”
Money managers struggled to explain why stocks are falling now as opposed to other times in the last 18 months. Gross domestic product has expanded by 3.5 percent or more in three of the last four quarters after averaging about 2 percent over the previous five years.

Greed, Fear

Stocks may have been incorporating expectations for even faster growth. The S&P 500 has risen at an average quarterly rate of 4.5 percent since the last bear market ended in March 2009. Its 197 percent advance between then and Sept. 18 is exceeded by only two bull markets since 1962, according to data compiled by Birinyi Associates Inc.
“We printed a great growth number in the U.S. and things were OK,” Jason Brady, a money manager at Thornburg Investment Management Inc. who helps oversee $74 billion, said in a phone interview from Santa Fe, New Mexico. Now, “the world seems like a more challenging bet. People had lots of hope for what’s happening in Europe and now we’re marking it down. China is looking more challenging with commodities prices. It’s shifting the focus. The pendulum is swinging from greed to fear.”
Stocks are declining as the Fed winds down its third round of bond buying under quantitative easing. Previous selloffs correlated to the conclusion of past programs. When the first round of QE finished in March 2010, the S&P 500 peaked the next month and dropped 16 percent through July. When QE2 ended in June 2011, stocks were in a midst of a decline that sent the S&P 500 down 19 percent, the closest it has come to ending the bull market.
“I don’t think there’s any way out of this gracefully,” Neil Grossman, the St. Petersburg, Florida-based chief investment officer at Tkng Capital Partners said by phone. “The difference now is we’re at the end of Fed accommodation and you’re about to start the process of transitioning not only from no QE but eventually to normalizing rates.”