Schaeffer's Trading Floor Blog

Reminder: The Next Market Crash Will Be Unpredictable

When will we get the next big correction in stocks? Whenever it's time

by 8/6/2014 8:02 AM
Stocks quoted in this article:

Ben Carlson on Pragmatic Capitalism digs up some quotes about market losses from a Peter Lynch interview in the 90s that are truly timeless:

Now no one seems to know when they are gonna happen. At least if they know about 'em, they're not telling anybody about 'em. I don't remember anybody predicting the market right more than once, and they predict a lot. So they're gonna happen. If you're in the market, you have to know there's going to be declines. And they're going to cap and every couple of years you're going to get a 10 percent correction. That's a euphemism for losing a lot of money rapidly. That's what a "correction" is called. And a bear market is 20-25-30 percent decline.

They're gonna happen. When they're gonna start, no one knows. If you're not ready for that, you shouldn't be in the stock market. I mean the stomach is the key organ here. It's not the brain. Do you have the stomach for these kinds of declines? And what's your timing like? Is your horizon one year? Is your horizon ten years or 20 years?

What the market's going to do in one or two years, you don't know. Time is on your side in the stock market.

I guess the only thing that's dated is the frequency of the corrections; they don't come every two years or so anymore. But the philosophical take on them rings as true now as it did then. And will ring true in 10 years and 20 years, too, no doubt.

None of this is to say everyone should handle market dips and volatility rips in the same fashion. It's more about knowing yourself and your own risk tolerance. If you feel better buying protection, that's fine. If you'd rather just ride it out, that's fine too. It's all personal preference.

What's more important, though, in my opinion, is the part about just accepting the inevitability of declines and the unpredictability of their timing.

News organizations get fixated on finding a proximal cause for every market blip. But the reality is that the news event or Fed thought or whatever that "caused" a meltdown might have been a story that's around for a while. The market probably ignored it at first, then became consumed by it. And at some point the selling stops, and the market ignores the very same news story again.

Unrest in Ukraine is one story that's been floating around for half a year now, and the market has already cycled through the five or so stages of reaction. We've gone from Disinterest to Obsession to Discounting to Disinterest to Obsession again OK, that's only three stages. I ran out of synonyms. My point, though, is the story itself doesn't really change all that cosmically -- it's the market's mood that changes, and this becomes a ready backdrop to explain S&P 500 Index (SPX) moves.

Throw in Gaza, Syria, Argentina's Default, Andy Dalton's Ginormous Contract, and whatever else, and you have a general "world falling apart" meme. Which, yes, is generally all horrible (unless you're Andy Dalton). But it's debatable whether there's much more scary stuff going on now than at various other times. It's just that the market has gotten shaky, and now there "must" be some sort of connection. Throw in fears of the Fed tightening policy faster than expected, which also shows up when the market stops going up, and we have our "cause."

Except none of it is really going to matter. This correction will pass. Or not, maybe this one lingers longer. But it's more about the market just being ready than anything else. And knowing in advance when that's going to happen is pretty much impossible, despite what lots of tele-pundits tell you.

I've noted that we're getting about three to four significant CBOE Volatility Index (VIX) pops every year since the longer-term rally began in 2009. We're basically in the middle of Pop #2 of 2014. This one will pass at some point, and then we'll likely get another one late in the year or so, and there will be lots of bad news stories and fears around, and we'll connect it all together. But the reality then will be as now -- it will just be "time."

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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