ICMC Believes the Current Weakness in The U.S. Equity Market Will Not Likely Develop Into a Bear Market, Yet!
By Ralph Heffelman and Leo Copanski
The equity markets have been on a rollercoaster ride in 2018, with the latest substantial dip having many wondering where we’re truly heading. Based on current trends, we believe the recent weakness is a market correction, and we don’t believe the U.S. equity market is entering bear market territory quite yet.
Historically equity Bear Markets (typically defined as declines of 20%, or more) precede economic recessions, which explains why they are generally regarded as a leading indicator. Another Important distinction of bear markets is that they seldom occur in the absence of an outlook for an impending recession.
It is the fact the recovery in the U.S. Economy after the so-called “Great Recession” of 2006 – 2009 has been one of the slowest on record following any recession. That said, the recovery is now in its eighth year which is also of historical importance.
The recovery in the U.S. continues to strengthen, accompanied by a synchronous recovery in most of the important global economies. The recovery in those economies began later than in the U.S. which explains, in part, why the recovery in the U.S. appears to be gaining momentum and why it could continue far longer than most expect.
Corrections (declines of less than 20%) are good for the long-term health of the markets because at a minimum they work to keep bubbles from developing by shaking out the speculators. Declines resulting from the bursting of bubbles are typically far more damaging than declines from other causes such as excessive valuations.
Following the November 2016 U.S. Presidential Election, the equity markets have risen materially to levels that are by historical measures among the highest ever recorded, which made the U.S. Equity market long overdue for a correction.
That said, the economic backdrop for corporate earnings is solid, and most recently, the change in the tax law seems almost certainly to add fuel to the prospect of continued earnings growth, therein increasing the probability that equities will be able to grow into their valuations. Also, the current correction would have the effect of lowering the valuation bar, leaving room for a recovery in stock prices leading up to any future bear market.
Traders are seldom good enough to time their sell’s and buy’s during market corrections and usually end up losing capital by either selling too late, and/or then buying back in too late following the recovery which can occur quickly.
Typically, ICMC’s primary risk reduction strategy is to employ a strategically allocated portfolio strategy that consists of diversification into multiple different asset classes, each of which possesses a unique correlation to the others. Under all but the most severe economic disruptions such as the “Great Recession” this approach will minimize portfolio risk resulting from an otherwise catastrophic collapse of any one asset class.
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