It hasn’t taken too long for the doom-mongers to step into the spotlight or should that be crawl out of the woodwork. The Cassandras with their prophecy of impending disaster for the stock market are back at it again. Some expect at least a 10% correction in the US market, which they reckon will begin no later than by mid-August.
Others are less specific about the magnitude or even the timing of a correction. But they seem content to say that it could be ugly. I have no idea what ugly actually means. But if it is a 10% drop from its recent high, then it is known as a correction.
Corrections are normal. It simply means that excitable investors collectively think that the market might have become a bit too optimistic, and that share prices might be frothier a than a Starbuck’s cappuccino. Consequently, they have decided to blow off some of the foam by selling some of their shares.
When the market falls by more than 20% from its most recent high, then it is known as a crash. It sounds much more dramatic than a correction, and it probably is. But whilst these types of movements are unpleasant for some, they are also not unusual.
Between 1968 and 2020, the S&P 500 has fallen by more than 10% on 28 separate occasions. It has dropped by more than 20% on seven occasions. So, over the 52-year period, a correction has happened once every two years. A crash has happened once in seven years.
Put another way, you don’t need to be an egghead with a spreadsheet to predict a correction. You have a 50-50 chance of being right if you just make the same call every year.
The fascinating thing about a crash is that we wouldn’t have one unless the stock market has risen. So, nobody should be too surprised when markets drops from recent highs.
Just think about it. If the market never drops, then everyone would buy. When that happens, the market would become so expensive that some investors would no longer be interested in buying shares, anymore.
When there is a dearth of buyers, shares will fall until they become cheap enough for some to start buying again. Then we go through the wash-rinse-repeat cycle until we reach another high.
Einstein reportedly said that not everything that can be counted counts, and nor can everything that counts can be counted. Stock market indices don’t count, even though they can be easily counted.
What counts is how much we pay for what really matters to us. In the case of income investors, it is how much we are prepared to pay for every dollar of dividends. In Singapore, the Straits Times Index is offering a 2.9% yield. That still looks attractive when compared to risk-free alternatives. And should the market correct by 10%, it could look even more attractive.
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David does not own shares in any of the companies mentioned.