Wednesday, April 24th, 2019

Get Ready for the Yearly 10% Stock Market Correction


Contrarians have been predicting a stock market correction and they are about to be right. CNBC writes that stocks are about to tumble by 7 to 10 percent. They make this projection based on the fact that such a correction or more has happened at least once a year since 1995.

The S&P 500 has suffered a 7 to 10 percent decline in each year since 1995. I believe this year is no different – and that, in fact, such a decline is around the corner.

First of all, the market’s strength appears to be flagging. Sure, the S&P is up 9.2 percent this year, but more than half of that advance came in the first two months of 2017. It is striking to note that right now the index stands almost exactly where it found itself at the beginning of June.

This is odd, because the fundamentals have proceeded quite well. The improvement in earnings we saw in the first and second quarters, and the recent better-than-expected economic data, have all become evident after most of this year’s rally had already taken place. In other words, this is yet another example of when the market moves differently than the way fundamentals tell us it “should” move.

The number of stocks that fall compared to the number that rise on days when the market goes down is a scary indicator. Recently when the market fell by 1.5% twenty stocks went down for every one that went up. This is happening while the Fed is preparing to shrink its balance sheet. The amount of liquidity in the financial system will gradually fall until several trillion are removed from the Fed’s bond holdings. This unseen set of actions will act as a drag on the economy and on the market. A fundamentalist would predict that the Fed’s action will cause the market to fall by more than the usual yearly 7 to 10%.

Hope vs Reality

When Trump was elected the markets briefly fell and then buyers came in with the hope that the new president and a Republican congress would pass laws and change regulations thereby causing a big economic stimulus. The market went up. The first two quarters of the year were good economically but now the market has leveled out because the Trump economic band wagon is not running. Profitable Investing Tips takes a contrarian approach and asks how much will it cost you to stay in the market?

Ron Paul, the perennial libertarian presidential candidate is in the news for predicting that the stock market will fall by 25% or even 50% within the next twelve months. Market Watch writes about Paul’s assertion that stocks may get chopped in half within the year. Paul may not be right on the amount of a correction or the timing but eventually all rallies tend to overshoot and then correct. How much will it cost you to stay in the market through a correction?

We asked recently, is it time to get out of the market? If you stay in get ready for the yearly 10% stock market correction or worse.

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