Can things get any worse?
About 31% of the stocks in the S&P 500 are down 30% or more from their 52-week highs, despite the U.S. job market continuing to show solid gains. A top-quality company such as Starbucks (SBUX) has seen its stock taken to the woodshed by 10% this year on the mere fear of a sharp retrenchment in demand for coffee in cooling China. Coca-Cola (KO) noted on Tuesday that unit growth slowed in China sequentially in the fourth quarter, so the market's fear over demand for the pricier things Starbucks sells is not totally farfetched. Still, Starbucks kicked some major butt in the former emerging market in the fourth quarter.
Elsewhere, boring-as-hell utilities are outperforming high-growth names such as Facebook (FB) and Amazon (AMZN). Suddenly, it's better to own safety than to try to project an Internet company's growth as the world allegedly grinds to a halt. (Starbucks and Facebook are part of TheStreet's Action Alerts PLUS portfolio. Amazon is part of the Growth Seeker portfolio.)
Amid all the topsy-turvy headlines so far this year comes the inevitable question: Is now the time to buy because it can't possibly can't get any worse? Well, I am here to say yes, buddy, things could get worse, and potentially more damaging to one's net worth in the weeks ahead. Remember, champ, the market has not given you any inkling that it wants to trade up on good news. Nor has the market displayed a desire to trade up on bad news amid speculation the Fed will be forced to cut interest rates after just raising them in December.
I expect grim comments from Janet Yellen's testimony today, which will be a nice test of whether the market has reached a point where bad news is good news.
In these types of markets, there are some very basic survival rules. Heed them and you have a chance to come out of the turmoil absent a ton of blood on your face (but make no mistake, there will be blood). Don't heed them and you may be caught in the unenviable position of: (1) absorbing serious losses; and (2) absorbing serious losses and being very gun-shy about buying on weakness when the time has clearly emerged to do so.
Rule No. 1: There Are No Good Companies
Using Starbucks as an example, yes, it had a fantastic fourth quarter. Clearly, people in the U.S. are scarfing down expensive lattes and increasingly doing so via the company's nifty mobile app. Demand in Europe bounced back reasonably well after the terrorist attacks in Paris. And, again, China delivered solid sales.
However, in these kinds of crazy markets, even best-in-class companies will be viewed as doers of nothing good. The market only sees them as rife with risk -- chiefly premium valuation relative to peers being reined in due to an unexpected quarterly sales or earnings miss as macro factors take their toll.
Do not fool yourself into thinking great companies are buys on every material dip in the stock price. It's just not true -- and that holds solid even if you are planning to hold the stock for the next year or two.
Rule No. 2: Horrible Companies Become More Horrible
What you are seeing in the current market is not only quality companies taking a plunge, but also companies with dreadful fundamentals taking more of a beating. Case in point is Sears (SHLD), which is my candidate for Real Money's Worst Stock in the World. Shares of Sears traded down into the company's sales pre-announcement released on Tuesday -- we all knew the numbers would stink. Well, the numbers definitely stunk. But instead of the market buying Sears shares on the premise the worst-case scenario was priced in, it sent the shares down another 7%.
Where are the buyers in LinkedIn (LNKD) following its 50% stock crash last week? The stock continues to be hit.
In bad markets, bad companies get worse as fears of slowing economic growth around the world further expose poor fundamentals. So don't become fooled into thinking the worst is behind the worst companies and valuations are crazy cheap -- it will likely prove to be an unwise train of thought.
Rule No. 3: Emerging Markets Don't Exist
For years, the "BRICs" have served as a lifeline for investors. A country such as China, for example, has delivered red-hot growth that has helped companies from Starbucks to Coach (COH) to Coca-Cola offset sluggish growth in developed markets like the United States. That is no longer the truth, however.
Companies are tempering their growth projections in emerging markets, and it continues to catch investors and Wall Street by surprise. Coca-Cola Chairman and CEO Muhtar Kent told me on a call Tuesday that the U.S. is an emerging market nowadays given its relatively solid rates of GDP. I think that comparison is quite telling as to how the great emerging-market growth miracle of the past 10 years is metamorphosing for the worse as we speak.
The reality is this when it comes to today's emerging markets: They don't exist. Sure, growth in China may be 6% in 2016, but that is much slower than realized in 2015. The stock market is only seeing the slowing rate of growth, not what the country is doing on an absolute or relative basis.
It would behoove you right now to hold a conservative view of future emerging-markets growth when estimating sales and earnings of potential investments. By doing so, you may be able to avoid being negatively surprised on an earnings report while potentially spotting a mispriced stock before others in the market.