Building a Foundation

With the news being uniformly bad in this morning’s WSJ I see nothing to be gained by piling on. Yes the market is overvalued, but what is there to say that it will not get wildly more overvalued before it corrects like it did in 2000. So I will try to find a more positive perspective.

Since I first got involved with the stock market (as a registered representative at Merrill Lynch in 1967) the market has experienced approximately twenty, 10%-20% corrections similar to what we experienced in 2015. This included three bear markets that could be classified as generational 50% corrections, and one (1987) approached 40%.

In 1967 on my first day a Merrill Lynch, the Dow Jones stood at 890. Today after all of the mayhem listed above, a year of slow economic growth in the developed world, the explosion of numerous commodity bubbles, a plethora of problems in various “emerging?” markets, the Dow hangs in there somewhere above 16,000.

There were many fundamental causes for these 20 odd corrections, yet they all carried marked emotional similarities, they usually end in some form of capitulation, and they do end until they have generated a certain flavor of panic in the media. No matter how long or deep the correction the market always turns with the financial media convinced the market is going lower (usually much lower).

No matter what their different characteristics these bear markets always end, and (with the exception of the big fifty percent corrections that take a little longer) it is not more than a year or two before the market is making new highs.

The good news is, these market corrections serve a very important function in our economy, and while painful, they are necessary. This is how we find who went swimming without their suit, or in a broader sence it is when we discover all the mistakes than were made in the preceding bull market. Like the oil and gas companies that were borrowing like crazy because oil was selling at $100 a barrel, or the emerging economy that has accepted corruption a viable alternative to productive work for raising personal income.

The Corrections are the reason that the market economy works and socialism does not. Mistakes are exposed; individuals, companies, and economic systems that learn from their mistakes grow more prosperous. Those that do not learn disappear. The most important thing about the corrections is not the pain they bring, but problems they expose because in this way they build the foundation for the next leg of a long bull market.