Oak Associates' Mark Oelschlager Provides A Mildly Positive Market Update

In a letter sent out to shareholders last week, Mark Oelschlager, 
co-CIO and portfolio manager at Oak Associates, provided a market update as volatility went amok. The expert noted that large-cap stocks lost 10 percent of their market value over just six trading days, setting new historic records for volatility.

Moreover, he added, in the six trading days comprised between August 17 and August 24, the median S&P 500 stock fell 18 percent. According to research firm BTIG1, the S&P 500 has fallen by more than 18 percent in such a short period in only three occasions excluding bear markets.

What Caused The Rout?

Oelschlager tried to explain the steep selloff. He assured that China is being blamed the most, as its economy continues to underperform, its stock market crashed and the authorities are devaluing the yuan, “which seems to have thrown the financial world order out of balance. China's managed economy relied for many years on fixed investment (physical assets such as land and buildings), which resulted in a misallocation of resources that it is now dealing with,” he expounded.

Related Link: Not A Manic Monday: How To Proceed

China now faces a tough decision: Should it double down on its previous policies or shift to a more consumer-driven economy?

According to the expert, “Either choice may be painful for them, and whichever one they make, there will likely be lots of money thrown at the problem, as seems to be the default policy prescription around the world these days.”

There is some good news though: Oak Associates estimates that the current events do not suffice to drive the U.S. economy into recession. “Things can always be different this time, but the conditions that typically precede recessions are not present,” Oelschlager stated. “And if we are not headed into recession, the recent downturn in the market appears to be unjustified.”

The investor provided a few reasons to believe this selloff may be ephemeral and that equities may recuperate soon.

  • The VOLATILITY S&P 500 VIX, also known as the "fear index," surged above 50 on Monday. This has happened only one time in the last 20 years, in February 2009. This turned out to be an great time to buy stocks.
  • “AAII bullish investor sentiment, which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months, has fallen to a level seen only a handful of times in the last 30 years. Each of those times proved to be a terrific time to buy stocks.”
  • “The CBOE (Chicago Board Options Exchange) put-call ratio hit an all-time (20+ years) high on Monday - another excellent contrarian signal. The put-call ratio has long been viewed as an indicator of investor sentiment in the markets, as the ratio represents a proportion between all the put options and all the call options purchased on any given day.”
  • Much of the selling activity on Monday seemed relatively indiscriminate and thus, somewhat “forced.” The expert explained it was “likely driven by liquidation of ETFs (exchange-traded funds) and futures contracts. If the selling were truly indicative of an adjustment to the assessment of U.S. economic prospects, we would have expected greater differentiation in Monday's trading, rather than defensive stocks declining as much or more than non-defensive ones.”
  • Research firms are increasingly sharing lists of equities that can navigate healthily through the turmoil, a sign that the storm may be passing.

“As always there are no guarantees, but, in our view, these are all very positive signs,” Oelschlager concluded. The firm believes that “once again those that keep their cool will be rewarded in the long run,” and thus remains invested, as it thinks this benefits its clients over the longer term.

Image Credit: Public Domain
Posted In: Analyst ColorEmerging MarketsMarketsAnalyst RatingsBTIG1Mark OelschlagerOak AssociatesS&P 500
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