When Will The Stock Market Decline, Finally?

Posted on November 24, 2017 at 9:01 AM PST by

We’re in the second-longest bull market in history, the most durable run since 1929.

A bull market by definition is a slippery concept. Some observers look for stock returns higher than bond returns. Others define it as any period in which there are no 10% declines, known as “corrections.”

Like the famous judge who defined pornography as “something he knows when he sees it,” a bull market for stocks can be just vague enough that people hardly recognize it until it ends.

Then, once the stock market decline starts for real, everyone agrees on what they see. Stocks fall sharply, a recession kicks in (or precedes the decline in stocks) or some other indicator becomes too hard to ignore: a lending freeze, unemployment spiking, corporate bankruptcies on the rise, and so on.

stock market decline

Bank of America thus made a bit of news by predicting that at some point in 2018 the current bull market will end.

What will cause a stock reversal this time? According to the bank, interestingly, the collapse will be preceded by a sudden spike upward in stock buying, probably driven by tax reform or additional monetary priming by the Federal Reserve.

Effectively, the bank’s economists think stocks will go higher next year, perhaps sharply higher, before crashing downward.

In a sense, the bank is right. Generally speaking, a rapid move upward in stock prices can be the lit fuse that turns into a rout for stocks soon after.

Similarly, of course, a crash in stock valuations is often followed by a sharp rebound. What was really different about the 2008 market decline was just how long it took to recover the losses, and just how mild the gains have been in the years since.

Is it different this time? The important point here is that absolutely nobody knows for sure.

The underlying data on the U.S. economy has been solid, if not inspiring. Investors have been willing to hold so-called “risk assets” for quite a long time, and they haven’t been scared by the long, slow ascent of those investments.

Nevertheless, as the great John Bogle, the founder of Vanguard, put it:  “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

A 20% decline would be twice what investors consider a correction, and closer to a full-blow crash. Yet it’s not that much of a decline, relatively speaking.

The 2008 decline was 54% for the Dow Jones Industrials, for instance. Black Monday in 1987 was a 31% drop in one day.

The Crash of 1929 was a 90% fall by the time it ended, though it took months of false dawns to get there and was followed by the Great Depression.

Avoiding risk

Can you handle something altogether easier to swallow? If so, consider for a moment the investor who sold at the market bottom in March 2009 and never reinvested.

That person has missed a run upward of nearly 256% since then. In exchange for avoiding the risk of taking a 20% hit, you would have to be willing to miss 26.5% gain in 2013. And the 13.42% return in 2016.

Yes, there were some down years. But the annualized return on the Dow Jones plus dividends reinvested has been 14.6% since March 2009.

If you want to avoid stocks, you must also avoid those compounding gains. If you put $10,000 into stocks in March 2009 and let it compound at 14.6%, you would now have $29,749.

A 20% hit would reduce your investment balance to $23,799. Painful, but not the end of the world, assuming you 1) stayed in all those years since 2009 and 2) stay in now, even with a “double correction” that looks like bad news.

A tall order, but that’s what it means to invest in stocks. If you can’t manage it, then a portfolio with both stocks and bonds might be a better course.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.