Stock Market Corrections are a fact of life in a our economy. There are several theories that seek to explain this phenomenon, and I personally like to think it’s a result of our warped implementation of market economics, but what do I know?
Lately certain members of the press have been buzzing a bit about the stock market and whether or not it’s headed for a decline. Will 2014 be the year to kiss your post 2008 gains good bye?
Guns, Vienna Sausages, and…
The old conservative tirade is all about building your fallout shelter. And there are a number of financial “advisors” who have no problem placing Bush’s Baked Beans into someone’s portfolio—and since the brand is privately owned I’m not talking about a stock purchase here.
But you see many investment salesmen and women took copious notes during their numerous sales training seminars and hung on every word of that “disturbing questions” portion of the talk.
Complacent People, don’t Move their Money
I could also say that “complacent people don’t take action” but I think my choice above gets the point across a little quicker. Financial services “professionals” (my apologies to the real professionals out there) all learn that complacency is a locked door to prosperity. You as a potential client don’t even need to be happy, just not upset with your current situation, and there is nothing Sam the Security Salesman is going to do to infiltrate your inner circle.
So instead he comes at you with an attempt to dash your confidence. “The market is doing really well but (insert name of some bogus talking head here) mentioned this morning that a 20 to 30% decline could be on the way! Are you ready for that sort of decline?”
Sam just unlocked the door.
The Swine Flu, The Economic Catastrophe that Never was
In early 2009 I made a miserable trip to Rochester, NY to attend my then career company’s agency meeting. The agency itself over-hyped this particular meeting because there was a very special guest speaker coming. Some moderately successful agent from Florida who was coming up to talk about his successes in using the company’s proprietary “planning” software. The event was so awesome sauce that it was scheduled to be a two-day event! That’s right, I got to drive 1.5 hours (one way) to Rochester back-and-forth for two days just so I could learn the secrets from this stud’s playbook (I should feel blessed that they didn’t charge me to attend).
Actually I lucked out—sort of—a fellow agent and friend’s aunt lived in the area and he invited me to stay the night at her place so I didn’t have to drive. It was an awesome idea until we went to dinner and the waiter dumped an entire pitcher and four glasses of ice water in my lap (read: the only pants—wool at that—that I had with me) and the jerk still charged me for dinner.
Any who day one of this fantabulous event was largely unremarkable. In fact it was downright dreadfully boring—largely because the super star agent apparently didn’t make enough money to fly privately and so was held up in some sort of flight delay hell we normal people have to deal with on a regular basis—maybe he wasn’t so different after all? We conferenced him in via phone.
On day two he finally arrived and it was more of the same bloviating from the day before, only he made one comment that was so off the wall is merits mentioning here.
Somehow, I don’t remember how and it’s not really important, the swine flu topic came up. For those of you who have already forgotten, we had a breakout (a pandemic even!) of the swine flu in the U.S. in 2009 that caused a lot of people with just a little bit of knowledge/information to go crazy.
What qualified our
superstar insurance agent to become a virologist I don’t know, but he started to tell us that the Swine Flu was going to have catastrophic consequences on the US population, and he warned us all to go out and buy three months or more worth of groceries and be ready to hunker down in our houses for a while once the “real outbreak” took place. I guess this advice was a free add on (maybe he felt guilty about spending wasting all of yesterday on his cell phone from the airport as a room of 50 or so of us tried to here him through a conference phone. In any event, the advice was worth exactly what I paid for it. Nada.
But you’d better believe he had a fun time running around Florida telling retirees to get out of the market because the old H1N1 was going to ravage the Dow in a way that would make 2008 look like good times. Once you become skilled at scaring the crap out of people to sell products, you just can’t help yourself.
Is the Market Headed for a Correction?
I said a while ago that, statistically speaking, the market is trading at a higher than normal value. But the market is a complex multivariate phenomenon and we can’t really ignore the fact that as the economy grows the market should follow suit (we laugh a bit at the people who accept 3% per annum GDP growth who also want to tell us about a 10% per annum S&P 500 growth, but that’s a topic for another day).
Both the Dow and the S&P currently have P/E ratios are that are above YTD figures last year and outpacing forecasts, which means we’re further stretching beyond what most of us think is normal.
Then there is the more difficult to quantify considerations, like a major economic speed bump. Our conservative friends want us to believe that PPACA is such a speed bump, and they may very well be correct. There’s certainly an implementation failure unfolding as healthcare.gov continues to be a problem. And many people are learning what it costs to be force-fed health insurance in a guaranteed-issue-no-pre-existing world (welcome to Vermont United States of America—actually there’s been a number of states to adopt guaranteed issue no pre-existing conditions where health insurance has been absurdly expensive for a while).
But throw us into a post-apocalyptic world where the only things that matter are Guns, Gold, and God (hey it was Glen Beck and Dave Ramsey who came up with that one, so don’t blame me for the tackiness)? I highly doubt it.
If the DJIA and the S&P500 were to retract to their forecasted P/E ratios we’d see (at worse) a 12% market correction. Not fun, but also not the end of the world. Let’s say that decline gains some momentum and turns into a freak-out sell off and the market dives 25%, we’re all still alive.
It Happens get used to it
Despite what some might want you to believe, the market is going to boom and bust many many times from now to eternity. The trick in navigating this world is in understanding what you can use the market to accomplish. The paradigm that the 1980’s and 1990’s established regarding the stock market as America’s de facto retirement savings option is probably in serious need of revision. But this doesn’t mean that you should cash in your GE shares and head to the Home Depot to get started on that fall-out shelter.
Diversify, and I don’t mean by different equities, your portfolio and get ready to take advantage of a downturn. There’s more to investing than just having a buy-side long position—that’s right not all of the world’s problems can be answered with a Vanguard ETF.