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SERVING HOUSTONIANS AND SURROUNDING AREAS SINCE 2002
For a while there has been concern for a market correction or worse a plunge similar to 2008 - 2009. That fear is further complicated by how the US now handles foreign policy and US adversaries. Nevertheless, let’s take a look at the market.
There are fundamental reasons for this long bull market, which probably still has some run to run. First a bit of background information. There are two types of recessions: economic and financial. The recession we experienced most recently was a financial recession, lasting from 11/07 to 10/09.
An economic recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
A financial recession, also known as a balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. Our financial recession was near crisis, bordering on collapse absent the Fed having provided liquidity.
History has shown that after severe financial recessions as we had, growth is slow and prolonged, resulting in bull markets that last longer. The bull market, which like any market is a reflection of the underlying fundamentals, spending, housing, jobs, etc. last longer because people and companies are, out of caution, much slower to return to the robust spending patterns that they exhibited prior to the financial recession. During recovery, people allocate more to saving than spending, resulting in tepid recovery of fundamentals. Consequently, they spend at a lower level over a longer period, rather than a quick return to “normal” or pre-recession spending as with an ordinary economic recession.
The foregoing explanation only considers our US recovery. Now, add to that the global economic recovery, which only began this year. With the global addition, even if that recovery is shorter than the US recovery, global markets and ours may remain bullish for another 12 to 24 months.
For another reference point consider the trend of the stock market subsequent to the Great Depression of 1929 (our worst financial event wherein banking did collapse) and World War II ( where capital was diverted from consumer spending to the war effort), which ended in ‘45, the bull market ran for nearly 22 years accompanied only by periodic corrections.
Having said all that I have anticipated a correction for about a year or so, more as a result of some emotional reaction rather than on a fundamental basis. I do not think that the market is overvalued as a result of the continuing bull, especially now that a global recovery is underway, but I do think a correction could arise from an emotional response either to some world event or unexpected transient crisis.
In conclusion, it’s not unreasonable to expect either a continuance or a correction, but I very much doubt we’ll see anything as catastrophic as in ’07 to ’09. And, if you're a long-term investor, with cash available for three years or more, you can probably be indifferent to a correction.
For more commentary look to our pages: The 24/7 News-info Cycle and Your Investments and The Great Recession of 2007-2009.
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