Staying the course

Now that we seem to be experiencing the much-awaited stock market correction, we have a new crop of doomsayers preaching that the end of the (financial) world is nigh.

Of course I can’t say they are wrong, any more than I can say that a catastrophic earthquake won’t happen. However, history suggests that the more financial catastrophes are predicted by the experts, the more moderate our market declines are likely to be. Why does this happen? We don’t entirely know, but I’m guessing that it has something to do with investors’ emotional preparation. If they are hearing a lot about financial catastrophes, they are likely to be more cautious from the start, and less likely to be surprised.

Here’s one expert’s prediction, and it’s a genuine emotional slap. “Sell everything” is a very strong statement, especially when issued by a bank.
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Here’s another, and it’s also frightening. Simply envisioning a stock market decline of 75% is painful.
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Of course, I wouldn’t be surprised if the S & P 500 DID decline 30%. The world faces many headwinds currently, and the financial markets have been both blindly optimistic and historically overvalued. But, historically, a bear market of -30% which passes in a few years is not catastrophic, in fact, normally, it tends to be a buying opportunity. In contrast, both these pundits are predicting 1929 or 2008 style train wrecks which take a decade or more to heal.

However, we CAN’T PREDICT THE TIMING OF SUCH AN EVENT ACCURATELY!!! If there’s anything I’ve learned in the past three years, it’s that statistics can identify probabilities, but they can’t deliver accurate forecasts relative to when the forecast will occur. Yes, it’s possible that the downturn which is now emerging in the stock and bond markets will be severe. But the predictive indicators aren’t really saying that now. They are suggesting that we may have a downturn, which won’t be completely catastrophic.

In fact, the Value Line Median Price Appreciation Potential, which has a very good historical record for accuracy, indicated that the S & P 500 was overvalued three years ago. Since then it’s suggested that stock markets have grown ever-more overvalued. Now it’s actually becoming slightly more attractive and less indicative of future stock market maelstroms.

In my experience, the worst financial market train wrecks happen when everyone thinks the world is just wonderful. That’s certainly not the case now. I’m maintaining our relatively defensive, highly diversified positions, and I’m still keeping us invested somewhat in the stock market. The reality is that we don’t really know what will happen.