The Past Week: The Beginning of Something Bigger?

Markets go up and down. The stock market typically moves so more than the bond market. The gold market even more. The gyrations are labelled "volatility" by the financial services industry. 

At the end of the day, volatility may not be pleasant, may even be scary. But in and of itself, what does it matter. If things plunge, then shoot back up again, we're left where we began. This down, then up again phenomenon - one manifestation of volatility - allows investment advisers to tell people to just "hang on" when their accounts tumble. Just hand on and it will come back. That's what they say.

And there's truth in it. Many times it does just that. In fact, most times it does. 

I just read that, on average, the stock market endures at least three 5% correction in a given year. (I haven't had time to verify this, but let's go with it for now.) That means at least three times, your account - or at least the stock portion, drops 5% (sometimes more) but rebounds fairly quickly. Your adviser tells you to hang in there. You do. It seems the advice was correct. Right?

Sure. But there are times when markets tumble - and keep tumbling. Those times have been called "Bear Markets." We haven't really seen one of these for a long time. In fact, many of the investors that have poured into the stock market recently have no experience and little inkling of what it's like to live through a bear market.

Those of us who do know how nasty they are. If your investments are heavily weighted in stocks, you lose a lot of money. And you don't gain it back that quickly. 

The classic example you may have run across is the bear markets of the Great Depression. After the second bear - the one that began in 1937 after the recovery from the Great Crash of 1929 that bottomed in 1932 - it took almost two decades for the Dow Industrials to recover the level they were at in 1929 before the crash. That's a long time.

Which brings us to last week. We had some down days. C'est la guerre, right? Except that Friday saw a sell-off right before the market close at 4 PM Eastern. While not a perfect gauge, that can mean the market will head lower on Monday - and maybe beyond. 

Now combine this with the fact that this year we have not had even one 5% correction - an anomaly. You might say we're due. 

Add in that we've been basking in a bull market since 2009 - using some metrics, the longest stock bull market every. (This ignores the brutal drop in February-March 2020, when the stock market reacted to the reality of the COVID lock-downs took hold. There's good reason to not count this as a bear market.)

And if we want, we can throw in a longer-term statistic. The stock market (along with bonds, gold, real estate, and just about everything) has been valued somewhere between 25% - 40% higher than historical averages, depending on the specific asset class. (The overvaluation would have been caused by the actions of the Fed during and after the bear market of 2000-2002, continuing through the financial crisis of 2007-2009, with an exponential increase of that historically extreme activity during this year alone.)

We could throw in a few more items, but let's pause there and add all that up. It lends credibility to the theory that we're due for at least a correction - maybe a sizable one - if not (finally!) a full-fledged Bear Market in stocks - and perhaps bonds as well (if not other asset classes too). 

Which brings us back to Friday's sell-off: Could it be not only the catalyst for a near-term sell-off next week but also the beginning of something bigger?

Ideally, your asset allocation has been configured in such a way that it matches your personal circumstances. For example, if you're a retiree living off a portfolio of all or mostly stocks, and the stock market crashes and doesn't recover for a while - maybe years - you could be in for a a rude surprise.

Whatever your situation, maybe an assessment of your asset allocation - if you haven't done this in a while - would be a good idea.