Market Corrections: Expect Them to Happen
As prices move ever higher, we will almost certainly experience periodic pullbacks. Extended bull markets have always been interrupted by episodic declines, better known as correct ions. Corrections can be short, lasting for several days, but a typical downward move is lengthier, lasting anywhere from several weeks to three or four months. Invariably, they are bound to come along, and they should not cause undue alarm. According to the investment firm, Deutsche Bank, the stock market, on average, has a correction every 357 days, or about once a year. Two years ago, Wells Fargo Asset Management published some of their findings for the previous 65 years. They determined that an average correction lasted about 4 months, and that the average decline from the peak to the trough was 14%. Remember that virtually no one sells at the exact peak, and it is accurate to say that almost no one buys at the absolute bottom of a trough. Therefore, it is literally impossible to sell at the high and re-enter the market near the low in order to capture this move.
A question that has continually come to us over the years, “Why don’t you sell when you think the market is pricey, then buy back near the bottom?” There are three very good reasons why. First, we don’t know how to identify the exact top or bottom. Secondly, if we believe we have a solid and growing company, why should we sell it? If we sell it at 50 and it goes to 60; – do we buy back at the higher price? Thirdly, unless the account is an IRA, we have created a taxable event and must start our holding period all over again. A long term gain (a stock held for more than a year) is given a far more beneficial tax treatment.
Please understand, we are not saying that a correction is about to begin this week or this month. But, as markets continually break into new high ground corrections can and will occur. If the price of your stock goes down, does this mean that the company has lost its customers, or sales? Has their operating capital suddenly diminished, or have they experienced any sort of financial upheaval? Most of the time – no! Without fail, all long-term bull markets will have corrections, and frequently these pullbacks are sharp and fast. When this happens, do not be discouraged. Instead, it may offer a serious opportunity. When corrections occur, the news will almost certainly be negative. If watching pessimistic news reports causes you to act in a manner destructive to your financial health, then stop watching it so much. And … when the market suddenly starts climbing again, remember that the news will not be improving, but likely will continue to be negative. Nobody rings a bell when prices hit bottom and it’s time to buy.
If you have followed some of our previous market letters, you may remember that back in early 2013, we were becoming very bullish on our outlook for some individual stocks and the market in general. We believed that year, 2013, was a very important breakout year, and despite a great deal of skepticism (many felt that the stock market had gone up too much, but we think they were measuring from the important bottom that occurred in 2009), we felt that we were embarking upon a new, very long-term, secular, bull market. Now, four years later, we see nothing to dispel that view.
What we expect for the next several years:
So, at the risk of being redundant, we will again say the following: When major bull markets come along, prices break through to new highs and continue to rise for many years. We characterize this type of a market as a Secular Bull Market. As bull markets begin their long multi-year upward climb, they always do so in a climate of fear, doubt, and pessimism. It is important to remember that when the market starts up, the news is never good. We have spoken with prospective investors who desired to invest, but decided to wait . . . until they saw what was going to happen to Greece; or who decided to wait … until the problems surrounding Brexit were resolved; or who decided to wait … until the election was over; as if waiting for these issues to be resolved would give them some dazzling vision and vivid insight as to the exact time to invest and which stocks to purchase.
The purpose of this letter is not to just continually pound on the same theme , but we believe it is important to state our opinion that, with respect to the stock market, we believe we are still very much on track. When secular bull markets truly get underway, they continue to progressively move upward for many years, typically fifteen or twenty. This is what is so difficult for most people to comprehend. This type of bull market gradually goes far higher than most anticipate, much to the disbelief and astonishment of the majority and contrary to mainstream opinion. The market will eventually culminate in an explosive blowout where optimism reigns supreme, but we think that is years down the road. It took many years for the real estate and housing to culminate in the bubble of 2006. This is not where we are now in the stock market!
Four years ago, in 2013, the S & P 500 Index decisively broke into new high ground for the first time in thirteen years. Only one year ago, in 2016, the NASDAQ Index crossed into new high ground for the first time in sixteen years. So, what is our point? Simply this; we believe this Secular Bull Market is in the very early stages of development, and it will continue to rise for many more years. Furthermore, we believe it will offer an opportunity to earn serious money- but, only for those who have the staying power, and don’t allow the inevitable corrections to scare them out.
We do believe this: There will likely come a time, probably a decade or more from now, when we should perhaps retreat to a more conservative posture – but – that time is not now!
Keep focused, and don’t be misled by negative news or deceived by short t erm corrections. A wise old trader once told me, “What is obvious to everybody is obviously wrong.”