Third Time a Charm?

Investment pundits have been complaining for quite some time about something lacking in this market.  Namely, a correction.  Indeed, corrections, or drops of 10% or more from a top, are fairly common events and usually occur once a year or so.  The last one happened during summer of 2011, more than three years ago.  So yes, we are overdue.

Note that for the last few months, the market really tried to, well, correct itself.  In October, everyone was worried about Ebola and economic weakness in Europe, and stock prices came within a percentage point of “official” correction territory, only to come roaring back to new highs.  In December, everyone was worried about falling oil prices, falling ruble and again weakness in Europe.  That time, the market managed only 5% or so decline before bouncing back.  2015 started quite volatile, but with prices down only about 4% from the peak we are not close to the coveted mark.  The worry this time – even lower oil prices and yes, weakness in Europe yet again.

If we have to worry about something, I think that falling oil prices would be a great choice!  Lower oil prices act similarly to a huge tax cut and are generally a boon to overall economy (oil companies excepted).  Consumers who have extra cash from saving at the pump will most likely deploy it elsewhere.  Indeed, looking at the most recent 5 drops in oil prices of 50% or more since 1985, stock prices were higher 12 months later on all occasions.  They were also higher during the periods of the oil price drops themselves, in 4 out of 5 occasions.  The only exception is the period of global financial crisis of 2008 that crushed demand worldwide.  Now, however, with U.S. output rising significantly due to fracking, we simply produce more oil than we need – by 1 to 2 million barrels per day on 30 million barrels daily output.  Eventually we will reach an equilibrium — OPEC may well succeed in driving some U.S. shale operators out of business.  But the argument that low oil prices are a symptom of weak demand, rather than oversupply, is faulty.

Struggling economies in Europe is a valid concern — and it was valid for all 6 years of this bull market.  Weak Euro (and conversely, strong dollar) will hurt profits of U.S. based international companies in the short term.  However, there is a definite historic correlation between a strong dollar and strong U.S. equities performance.  In any event, I would not read too much into currency fluctuations.

As for the correction, I am sure that it will happen sooner or later.  Some even argue that it would be good for the market, since investors who have been waiting for it will finally put their money to work after it happens.  Well, they have been waiting a really long time and have missed out on an 80% rise since that last correction in 2011.  That is why trying to time the market in any way is a sure way to under-perform the said market.  Instead, as I have been advocating for quite some time, ignore macroeconomic headlines like the ones above and instead concentrate on the companies your own.