Where Is The Skepticism?

Fifteen months ago, during the final months of 2018, the financial news was full of predictions of an economic recession in 2019. Now in hindsight, it is obvious all of those “experts” were wrong. Through 2019 the economy maintained a path of steady growth, and the stock markets gained almost 30%.

Not at the beginning of 2020, the majority of stock market predictions I hear forecast market gains of 10% to 20%, or even higher, up to 30% year for the major market indexes. There is almost no talk of an economic recession. It’s a goldilocks investing world, and everyone will be richer and happier at the end of 2020.

If the expert forecasts were so wrong a year ago, what makes them better forecasters this year. As the Yogi Berra attributed quote goes, “It’s tough to make predictions, especially about the future.” What I have observed is that the usual predictions extrapolate the past into the future, with little thought that current trends may change or reverse. One of my earliest observations in life was that everything goes in cycles. The only exception is that future forecasts rarely predict reversals in the current trend.

A stock market correction is defined as a 10% or greater decline in the major stock market indexes. If the indexes drop by more than 20%, it officially becomes a bear market. History shows that market corrections occur on average once a year, and the average correcting decline is 13%. The market did not experience a correction in 2019. While I am not predicting one, I will not be surprised if the investing world gets surprised by an “average” correction this year.

Even an average 13% drop will be a huge shock for an investing public that thinks stock prices will continue to march higher as they did in 2019. The drop will produce panic selling, and I predict if a market correction occurs, it will be steep and deep.

Currently, I recommend to my newsletter subscribers that they build up some dry powder in the form of cash in a money market fund or short term bond funds. If the stock indexes drop by 13% to 15%, I will be advised to invest on the drop into our favorite income stocks.

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Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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