Stockwatch: Reasons not to fear a bear market

What a mix of factors weighing on markets currently! Stock prices have rebounded in October as weaker US jobs deterred an interest rate rise, although Janet Yellen has just said the Federal Reserve may raise rates in December.  Or has she really? She's certainly gained a reputation for biding her time, but has at least put us all on notice.

Latest signs continue to suggest the business cycle is mature following an upturn since 2009, with US durable goods orders and consumer confidence slipping. Moreover, JP Morgan estimates the real US growth rate at only 0.6%. Year-on-year growth in the UK has slipped to a two-year low of 2.3%, being dependent on services, while manufacturing has contracted for a third quarter and construction seen its biggest fall in three years.

The International Monetary Fund (IMF) has downgraded its expectations for developing countries' growth as a stronger US dollar increases debt service costs. It might not altogether imply a recession but probably a tougher climate for revenues/profits; it's why extra care is needed to avoid firms that could be affected. What few pockets of resilient growth that do exist are rated highly in the stockmarket.

A trait in company updates is to distinguish "headwinds" - industry conditions, currency translation and the like - to help excuse management of falling short. It's quite the equivalent of "leaves on the line" or "dog ate my homework". They're effectively reporting via two income statements, before and after exceptional items. Not to over-emphasis this in challenging times, but those truly capable firms will see less need to, and investors should look to where tailwinds exist.

Lower oil prices point to economic stimulus

Remember, economic history shows recessions follow a sharp rise in oil prices, whereas their recent halving should provide a stimulus effect (excepting countries which are major exporters and rely on oil revenues for public spending). Possibly the chief factor why not to fear a bear market is there being no precedent where a major drop in oil prices has preceded a cyclical downturn.

Yet it remains hard to determine whether explorers/producers - and miners generally - offer value, pending how long commodities deflation persists. Metals markets may have been distorted by exceptional demand then a slump, according to China's infrastructure boom, and fossil fuels may be affected by new priorities. The United Nations' Climate Change Conference in Paris from late November could be a defining moment for sentiment towards coal and oil-producers.

If a low oil price scenario applies in support of global growth, there is an opposite effect for indebted oil firms especially. Trading interest has been generated in mid-caps such as Premier Oil and Tullow as they rebounded off lows during October, and a 6% oil price spike after the US Fed just deferred an interest rate rise.

Broadly, it shows the stockmarket up to its usual trick of anticipating recovery, but mind how current excitement diverts attention from the prospect of Iran resuming oil exports after sanctions are likely lifted soon. This potentially coincides with US refineries undergoing maintenance in early 2016, thereby reducing demand for crude oil. So early 2016 looks like being a tricky period which could conceivably herald bargains. It comes also after the Paris climate conference, which may put oil in the dock. Respecting oil's capricious nature, and if you are minded to buy, then average into stocks over time.

Apple and ARM sustain robust growth

With both companies reporting just lately, it is worth noting ARM Holdings' quality growth credentials, and also how its FTSE 100 shares closely reflect the chart for Apple Inc - both have been volatile during 2015 as perception of demand for smartphones and their microchips has wavered. Such "semiconductors" tend to be seen as a leading economic indicator, strongly correlated to production and factory orders, and an apparent slowdown in mobile computing has raised concerns.

Yet ARM's third-quarter results scotched doubts with a 24% rise in (sterling-translated) revenues and earnings per share up 29%. Admittedly, this is just a snapshot in time, albeit close to the stock's forward price/earnings multiple of about 30 times. And there's good progress on ARM's key growth drivers, royalty momentum and a healthy licensing pipeline continue.

Coinciding with Apple's record quarterly results, a latest survey of global smartphone sales shows a 6.8% like-for-like rise in the third quarter to the second-highest quarterly result ever. While Apple depends substantially on the iPhone, ARM is evolving its chips well beyond supplying Apple - towards "the Internet of Things". This makes ARM look one of the market's best quality growth prospects say for the next five years: enjoying strong tailwinds of technology adoption and the internet broadening.

While no company has shown itself capable of growing over 20% in the very long run, the wider economic context implies a scarcity value for genuine growth stocks. ARM's latest update therefore affirms it as a core portfolio holding to buy on the dips.

Capable UK retailers are prospering

Astute marketing together with UK wage growth and people's renewed willingness to engage credit, mean selective retailers are doing well. At Dunelm I recently noted directors buying stock in this bedding, furnishings and household items retailer, and I continue to notice the car park at a South Coast outlet quickly filling at weekends.

Debenhams seems finally to have its marketing act together after disappointments: I recently also drew attention at 79p ahead of prelims which have advanced the shares to 86p. Discount and online retailing continue to offer lucre as sections of British society remain low-paid and indebted: it is worth noting something of a break-out in the chart for Boohoo.com following its interim results, which show this company doing well as it meets the fleeting fashion interests of younger people, achieving 35% revenue growth with a 60% gross margin. Irrespective of where the economy heads, Boohoo's formula is on the ball.

So while a few retailers have issued warnings - notably Burberryregarding Chinese customers, and Walmart due to investment needs and the strong US dollar - adept marketing can meet the challenges and win through. We saw something similar at Sports Direct from 2012 despite other retailers flagging.

I have also noted various UK-listed (international) marketing services firms report bullishly as they capitalise on clients' confidence to spend after the upturn years. And while this could be a lagging indicator in the business cycle, it is another positive factor besides low oil prices and is able to support the business environment.

Central banks may still be critical for stocks

While I strike a positive note for stock-picking and the real economy, mind the extent of central banks' stimulus that has driven markets to record levels remains a tough challenge to reverse. Sentiment can easily sway negatively if profit warnings multiply, and global debt continues to grow. I don't agree with Crispin Odey's deterministic view of a recession ahead, but his near-30% cash position in a retail investment fund looks wise.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.