December and January Drop in the Market

The stock market doesn’t need a valid reason to fall into a correction.  Invariably, holders of stock, especially those who have not been investors, who may be new to investing, will ask their investment consultants and advisors what made this happen.  Market pundits typically do their best to comply and present some sort of reasonable explanation that will serve to satiate these curiosities.  For example, this most recent decline can be blamed on renewed worries of rising interest rates and rising inflation, and this has likely been some of the reason.  However, that is probably not the whole story.

This is Mike’s theory (Mike Hard is one of the original founders of Sara-Bay):   

After more than fifty years, in this business, I am not willing to accept a glib and simple explanation for most declines.  After a protracted rise, the stock market does not need a reason to go down.  In the short term, human emotion, not logic, drives stock prices.  When a sudden surprise such as war, pandemic, or natural disaster occurs, then prices are almost certain to take a hit.  However, another thing can occur, and this is perhaps more frequent. Declines may happen simply because stocks have been in a protracted rise for a pretty long period of time.  This causes worrisome thoughts such as:  How can prices keep rising?  This is bound to end, isn’t it?  This is an aberration, and I don’t deserve to make money this fast.

It is not uncommon that large institutional holders such as pension plans, mutual funds, or exchange traded funds, as a group, may own 50%, 60% or more of a company’s total outstanding shares.  When people think of the managers of large fund portfolios, we may picture them sitting in their ivory towers of glass and steel making calm, deliberate, pragmatic decisions where logic and longer-term views prevail.  I contend that often this is not the case, and when pressure is applied, they can be just as irrational and panicky as a novice investor.  Due to computer tracking, portfolio managers can be tracked and compared on a daily basis to other fund managers.  As a result, many of these supervisors are thinking of their performance, their jobs, their futures as they fire computerized cannons loaded with sell orders.  

The great money managers such as Warren Buffett, Peter Lynch, and many others who have outstanding long-term track records, are not under the pressure of such competitive mania.  They study the earnings, debt, cash flow, profit margins, quarterly sales, changing industry environments, and any important and pertinent data upon which they may rely.

Very long-term studies have shown that markets go up about 2/3 of the time and go down about 1/3 of the time, so this bespeaks that the declines are typically much faster (and scarier).  As we have mentioned before, all stocks, without exception, have periods of decline.  When a stock goes from $50 to $350 over a 5 or 6-year period, it will not have done so without substantial drops.  We would defy anyone to show us an exception to this.

Our conclusion:  short term, the market is unpredictable and reacts to emotion; over the long term, however, logic and good sense prevail.  We will continue to view the market and make our investments from a long-term perspective.

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