When Will Our Bull Market Take a Nosedive?

Posted: Updated:

Last year was phenomenal for the U.S. stock market. It's had a fantastic run since the dark days of 2008. But the question on everyone's mind is: How long can this last? And will we pay for it with another gut-wrenching crash? Here's what our current economic situation suggests...

The Optimistic Outlook

Let’s start with the good news:

  • U.S. economic growth has accelerated, and job growth remains strong.
  • The recently passed Tax Cuts and Jobs Act seems likely to provide a further boost to the economy - at least in the short term.
  • The 45 major economies tracked by the Organization for Economic Cooperation and Development (OECD) all grew in 2017, i.e. none were in a recession. All 45 are projected to keep on that growth path through 2019 (Source: Bloomberg, OECD).
  • The Leading Economic Index remains positive, indicating no sign of decline in economic activity at the moment.
  • Corporate earnings are growing at a double-digit clip and are expected to continue throughout 2018.

Most of these positive indicators refer to the economy in general rather than the stock market specifically; however, the two are connected. Historically, the stock market has fallen in advance of recessions. Fortunately, the likelihood of a recession seems low at the moment. This continuing (and potentially accelerating) economic growth is likely to support the stock market.

The Not-So-Good News

On the other hand, there are several reasons for concern:

  • By most measures, the U.S. stock market seems to fall somewhere in the "overpriced" to "very expensive" range.
  • Investors appear to be ignoring risk, either because they fear missing out on good returns or they are following an investment strategy based on relative returns. For example, some may think that stocks may be expensive, but they look better than cash at <1 percent or bonds at 2 percent.
  • The government's fiscal situation continues to deteriorate and the TCJA will likely exacerbate the issue over time.
  • The Fed has indicated it will raise interest rates in 2018, which could eventually have a negative impact on the economy.

None of these negative issues are currently affecting the stock market, but they may at some point.

Corrections, Bear Markets, and Crashes (Oh My!)

So what will happen to the stock market? To answer that question we first have to establish what exactly we mean when we talk about an "end" to the rise of the stock market. Three terms are widely used when referring to drops in the stock market, and each applies to a different situation.

Correction: When the stock market falls by greater than 10 percent but less than 20 percent. Corrections are fairly common. From 1900 through 2016, a 10 percent or greater drop occurred once a year on average (Capital Research and Management Group - A History of Declines 1900 - December 2016).

Bear Market: The term used when the stock market falls by greater than 20 percent. Bear markets are less common than corrections, but still occur once every 3.5 years (Capital Research and Management Group - A History of Declines 1900 - December 2016).

Crash: There's no official threshold for this term, but it usually refers to an abrupt and unanticipated drop, say 10 percent or more in a short period of time. Crashes are much less common than corrections or bear markets. Since 1900, there have been three major crashes in the U.S. stock market:  the Crash of 1929 (-23 percent in two days), Black Monday in 1987 (-20 percent in a day), and the Crash of 2008-2009 (-20 percent within a week).

Given that it's been two years since the last correction and roughly eight years since the last bear market, we are clearly due for a market downdraft. But there's no sure way to determine when it will happen and what it will look like.

I like to keep in mind a quote about the stock market often attributed to noted American financier, John Pierpont Morgan. When asked what the stock market would do, he succinctly responded: "It will fluctuate." That's been true since it first opened and will continue to be true until it closes.

Summary

We’d all love to know when the market will drop. But history has proven that’s an impossible task. Your best bet is to accept that the market will go down at some point and invest accordingly. Keep in mind that despite corrections, bear markets, and crashes, the stock market has delivered phenomenal returns over time. In closing, here’s a quote from noted investor Peter Lynch:

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

David Crossman, CFA, is an Investment Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email David.

  • Perspectives

    • Can You Fulfill Your Quest?

      All of us have dragons to slay. At work or at home, in personal or professional relationships, each of us is on a Quest to find the treasure or save the prince/princess. Or perhaps, our goal is more prosaic: getting that promotion, standing up to that bully, or finishing that big project. In his book The Seven Basic Plots, Christopher Booker lists seven story forms which story tellers employ over and over. Each is plot is linked to a fundamental metaphysical Question that we...

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • High Schools Launch Manufacturing Businesses

      Two student-run manufacturing businesses have launched in southern Indiana. The companies, Eagle Manufacturing at Brown County High School in Nashville and Lion Manufacturing at Loogootee High School in Martin County, are designed to give students hands-on, real world experience. The businesses were funded with grants from Bloomington-based nonprofit Regional Opportunity Initiatives Inc. In an interview with Inside INdiana Business, ROI Chief Executive Officer...

    • Buttigieg Launches Presidential Exploratory Committee

      South Bend Mayor Pete Buttigieg has announced he has launched a presidential exploratory committee. The Democrat, who is in his eighth and final year as mayor, served as a lieutenant in the U.S. Navy Reserve and ran in 2017 for Democratic National Committee chair. Buttigieg was elected mayor in 2011 and re-elected in 2015. In December, he announced he would not seek a third term. At the time, he would not comment on a possible presidential bid, but said he would continue working...
    • Hoosier Companies Among 'Most Admired'

      Two Indiana companies are included in Fortune's 2019 list of the "World's Most Admired Companies." The list was determined by a survey of nearly 4,000 executives, directors and analysts who rated companies in their own industries based on criteria such as investment value, quality of management and ability to attract talent.

    • Talent Incubator to Open in Anderson

      Muncie-based Ontario Systems will Wednesday open a new tech training center at Anderson University. The incubator, that will be known as "The Cube," will provide students with real-life, hands-on software engineering projects.

    • Hill Reaches $120M Settlement

       Attorney General Curtis Hill has announced a $120 million settlement with Johnson & Johnson and DePuy to resolve allegations that DePuy unlawfully promoted its metal-on-metal hip implant devices, the ASR XL and the Pinnacle Ultamet. Under the settlement, Indiana will receive $3.5 million.