At any given time, a consistent question of financial professionals is: What do you think the “market” is going to do? After nearly a decade of a rising stock market, this question morphs into: When do you think the “market” is going to drop, crash, correct, etc.? Needless to say, today’s stock market stokes the latter inquiry quite often. We are in a 9+ year bull market, it has to end soon, right?
Well, this ticking time bomb mentality has reared its ugly head once before. In fact, stock market history is littered with failed predictions. More pertinent to this discussion, just the prior 5 years has more than its share of less than accurate bold forecasts predicting the reversal of this strong bull market.
The below chart demonstrates (quite effectively) the inability of market pundits in calling market tops (or corrections). In fact, some of these “professionals” have multiple calls. I guess you will never be right if you don’t make prediction(s). But how many times do you want to be wrong before you give up your seat at the fool’s game of trying to predict stock market returns? If you heeded the advice of any of these prognosticators and exited the stock market, you missed out on anywhere from 10% - 100% returns… assuming you got back into the stock market at some point in the last six years. Painful!
So, what’s an investor to do? We agree that at some point the stock market will experience a correction. But, we definitely don’t try to predict when this is going to happen or to what degree. As you can see above, the fallacy in this approach is and will be quite damaging for as long as stock markets exist. I firmly believe that people trying to time the stock market is what gives new potential investors the erroneous thought that the stock market is a form of gambling! If we followed an investment approach that required us to “cash out” of our investments when we felt the stock market was at a top, we’d probably view it as gambling too.
Now, believe it or not, this is not the biggest issue with trying to call a market top. Because at some point, someone, somewhere is going to be right. Make no mistake about it, stock markets do correct… and someone will be there to say “Ah ha! I knew it! I called it!” And if I’m in ear shot, I will return that with “You did it. Now, can you tell me when to get back into the market?!?!” My guess is, I will hear the equivalent of crickets for the response!
Predicting the stock market direction correctly one time is quite the feat. Doing it a second time (back to back), in a short period of time, would be unbelievable (quite literally)! So, to make a long story short, to answer the question of when we think the stock market will crash, drop, correct… I don’t know and really don’t care. As long-term investors, our concern is that we have the correct investment time horizon to weather a correction… 100 years of history is a strong sample size to rely on.