Alan Greenspan starts his article in FT today with the following sentence - "The surprise of recent months is not that global economic growth is slowing, but that there is any growth at all". That is precisely the reason why bulls and bears alike are being challenged.
For, when one puts on the bear hat, one can argue that credit destruction should have caused things to fall apart. Unfortunately for bears, that hasn't happened. Amongst all the doom and gloom, US is still growing at a snail pace. China still continues to grow - and it was the reason given behind the commodity price spike.
So, should one then become a bull? If the once in a century credit crunch results in just a 20% decline in equity markets, why should one ever not be in equities? To that, the bears will argue - just wait and watch. The real destruction will start now as China and India slow, and capital to western financial institutions becomes scarce.
There are various dilemmas in investing right now:
a) Should one invest for quarters? Suppose a stock like Bharti falls to 14x PE today when it is growing at 20%+. I can say with reasonable confidence that the next 12 months are going to be fairly good, and the next earnings report will be solid. I dont know what happens after that -competition heats up, inflation hits rural India causing subscriber addition to slow down etc. Should I buy for the next qtr? The risk is that the stock doesnt recover in the next 12 months. Or for that matter PSU banks. Chances that they report good numbers over the next 9 months is good, after that who knows. How should one think about investing when next qtr might be good but 2 year out might be bad?
b) Should one buy stocks that would be the last to fall? Stocks like Colgate, P&G etc? If things dont fall apart, one will end up making money in these - their multiples have also compressed, although not that much. And if things become really bad, one wouldnt lose much (hopefully)
c) Should one invest on reversion to the mean? The amazing thing of last few months is - whatever has fallen has come back, and whatever has risen has fallen back. Banks fall, then rise, then fall again, then rise. Commodites were going one way, now are going the other way. India was going down, Brazil was going up - in the last month Brazil is down 20% and India is up the same. The risk with this is - one never knows when the mean reversion happens. People were shorting oil at $120 in May, they would be only even now. Besides, what is the mean? Still, this is worth exploring.