As the market continues to run almost daily to new all-time highs, the probability of a significant correction continues to increase. Of Course, the potential for correction has been with us since the lows. Still, it is a fertile field for media/pundit speculation and chatter. Ergo, I ask “so what?.”
Since my very first postings on kortsession.com five years ago, questions about corrections, bear markets and crashes have persisted — when, why and how severe? My response, then as it is now was a polite “so what?” I thought it would be useful to reprise one of those early posts, “Session 20, A Correction Is Coming! When and How Bad?”
A better question might be: Is it a normal market occurrence and should I be alarmed? My answers are YES and NO. I answer this way because a ten or fifteen percent correction (maybe a cyclical bear market, minus 20% or more)*, after the run we have had, would be perfectly normal and probably very scary, – not the end of the world.
I bring this up because my daughter has a co-worker who has been reading this blog and said, “If the market crashes, he is going to come and visit me.”
First of all, let me say, as I have said before, my blog is not the divine word of the Lord. I make mistakes. What I write about is based on five decades of experience with the market, economy, media and politics. I realize that I have been very constructive in these posts. My positive view is based in part on the premise that after thirteen years of flat market (point to point), I believe you have a good chance for longer-term positive returns vs. those available in the fixed income markets. To wit, Professor Jeremy Siegel, in his book “Stocks For The Long Run”, puts these compounded annual total real returns in the area of 7%. This is, by the way, for a period that dates from 1802 to 2006. This does not mean there were no risks and no corrections. There were tons over this 200+ year period, including the crash of 1929 and subsequent bear market(s).
What is interesting here is that if you examine the last most recent flat market period before today’s, you would find stocks returned (1966 to 1981) –0.4% on a real compound annual basis. Most people had had it with stocks in 1981, just as they have had it this time around. Equities were a dirty word. Following that gruesome performance in the next 17 years they returned 13.6% on a compounded total real return basis (the stuff dreams are made of). Even though higher numbers might be possible, a real (adjusted for inflation), long-term 7% total compounded number still feels much better to me than a 1.77% ten-year U.S. treasury (not adjusted for inflation).
What I am suggesting is that it may be safe to get back in the water. This does not mean to take all your money and throw it in the market immediately, especially if you have been sitting this one out. If you don’t own stocks, you probably should begin to piece money into the market over time. If you do own stocks and are leery about the market based on the happenings of five years ago, you need to view the market, economy and risks through a different prism. Quit looking in the rear view mirror. We wrote extensively on this in session 7 “My biases…” It is about inflation and why owning assets may be the best way to protect your money and why lending money (buying bonds—the current safe bet) may be no protection at all.
“What’s past is prologue”
Taking the Bard a bit out of context, “What’s past is prologue” in a market sense. That does not mean that the next market blow up, a la 2008, is just around the corner. It takes time, maybe decades, for things to bubble up to that kind of catastrophe (check out Session 3, “Current Events”), and there are always risks of loss in the short run (if you sell). In the long run, if Jeremy Siegel’s work is correct, there appears to be a lot of opportunity out there.
So when is the correction coming and how bad will it be? I haven’t the foggiest. And neither does the media. The experts have been calling for an end to this run since the presidential election in November (2012)*. It just may be good to stop fretting and focus on the potential long-term prize…a reasonable real return…potentially getting rich slowly.
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*Comment in parenthesis added 1/22/2018.