David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dav
Premise number one is that every bear market comes to an end eventually (as do bull markets). The second premise is that it is always darkest before dawn (it is pretty dark out there).
The market action (as in failed rallies) and lingering supply glut suggest that it is premature to be calling for a bottom here – but at some point, the low will be in, and I would bet in the very near-term (months, not quarters).
So as Mortimer sells (hat tip to the 1983 cinematic gem Trading Places), it pays to start thinking of what the financial world looks like after we see the end to the oil bear market, especially given the correlations to other asset classes.
Note that we have endured bear markets in oil before and there is a pattern that emerges in the ensuing year:
• The S&P 500 and S&P/TSX each recover roughly 20 per cent on average;
• Technology and materials actually outperform energy stocks as these cyclicals respond favourably to a return to 3-per-cent real GDP growth;
• The defensive sectors such as health care, utilities, telecom and consumer staples tend to be laggards;
• Bond yields rise but the Treasury curve steepens, which is good news for the banks, while rising rates and an improved growth backdrop trigger a sharp compression in credit spreads – by almost 70 basis points for investment-grade corporate paper on average and 265 basis points for the high-yield market;
• The recovery in oil is the rising tide for other commodities, including gold and other metals, and this in turn shows through in a typical near-6-per-cent appreciation in the Canadian dollar;
• Volatility rescinds as the rebound in oil prices tends to occur not just with a supply adjustment but also with demand either recovering or staying firm – this then proves to be fodder for the emerging markets universe, which in the first year of the energy rebound sees a 35-per-cent run-up on average.
I realize that it is early to be talking about what to do once oil bottoms, but as my grandmother always said, forewarned is forearmed.
It is no different than planning for the eventual return to technology sector optimism back in 2002 when there appeared to be no light at the end of the tunnel or how to proceed with an end to the despair in the financials space in early 2009 when the banks were priced for insolvency and/or nationalization.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.