The Bull and The Vulture By: Gabriel PotterMBA, AIFA® 2016.02.17

The Pickpocket

“I beg of you, Monsieur, watch yourself.  Be on guard.  This place is full of vultures… vultures everywhere.”

Casablanca

The spirit animals for the market are traditionally the bear and the bull:  the bear for downturns and the bull for market rallies.  The origins for the bull and bear terms for market directions are unclear, but the bull comparison makes at least some sense to me.  The bull is a symbol of power, strength, stamina, confidence, recklessness, and a driving heedlessness borne of great vitality.  Metaphorically speaking, a bull in a china shop doesn’t need to exercise caution because of its massive bulk and energy.  In real world terms, a bull can take a number of hits from a matador before going down.

Year to date, the bear has held sway.  After a disappointing 2015, domestic and international markets continued to fall through February, but the past week has offered a bit of relief, with key US, international, and emerging equity markets regaining 4% to 5% of their value.  This recovery has not been borne on heedless optimism, but a calculation that the market negativity has overshot the drop in the long term value these underlying stocks could generate.  There is a lot of damage to go around, some of it based on genuine, fundamental weakness.  For example, energy producers and their suppliers have disproportionately suffered in this cheap energy environment; we’ve seen estimates stating high yield bonds which support US hydrofracking operations may see a 25% default rate over the coming year.  On the other hand, a lot of good companies have been beaten up by this indiscriminate equity market sell-off.  Bargain hunters have begun to scavenge through the remains looking for good deals among the wreckage.  Patient investors who can ignore the emotional overreactions of investors may be rewarded for their savvy selections in the years to come, despite the lack of optimism or exuberance.  The spirit animal for this short-term recovery isn’t a bull:  it’s a vulture.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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