In case you haven’t noticed, the stock market has taken a big hit over the last two weeks. Since January 29th the Dow Jones Industrial Average has shed 2,235 points, dropping 8.4%, biggest drop in 2 years. Meanwhile since January 26th the S&P 500 has dropped 7.8%. And the market may well drop even lower. [And as I post this article on my blog (Tuesday, 2/26/18), stock prices are falling hundreds of points in early training.]
Donald Trump has made it clear on an almost daily basis that the reason the stock market has been rising since his inauguration is due to…. well, Donald Trump. (Never mind that the market was continuing to follow a trend which started under President Obama seven years before Trump took office.) Well, Trump is starting to figure out that “owning” the US stock market is not always a good thing.
However, based on my experience this is simply a correction – a downward movement of the market in the middle of an overall upward trend. Think of it as the market pausing to catch its breath before continuing to move upward. It usually happens when stock prices have risen too high to fast, as has been the case recently. Corrections are often called “health restoring” because they chase out of the market the nervous nellies, so that the stock prices can again advance again on a stronger footing. Some corrections will bottom out after losing 10% or less. More serious ones can lose up to 20% of the markets original value before starting to recover. (If the market drops more than 20% we will instead have a recession on our hands.)
The reason I think this is a correction rather than the start of a recession is because all of the stock market indicators that I watch have remained positive territory. The economy is actually doing quite well. Actually, I have been expecting a correction because for decades there has almost always been a correction in the same year as the mid-term elections. I would never advise anyone else on how to handle their stock portfolio, but I am maintaining my current stock positions and looking to buy more when I think the market has dropped enough. I believe in selling only when the market is high and buying only when it is low, not the other way around, and I firmly believe that this market will recover.
So, while I believe the current market moves are part of a correction and that stocks will rebound and move even higher, we must also take into consideration that the current bull market is long in the tooth. Stocks have move generally higher for eight years now and market swings from bull to bear and back to bull again on the average follow a four or five-year cycle. We are long past due for the start of the next recession. The reason why stock prices have risen for so long a period, and the bull market probably still has life in it, is that the last recession was so deep, it has taken a long time for the nation’s economy, and that of the rest of the world, to recover. However, when dealing with the market, what goes up must eventually come down.
In my view, therefore, a steep downward turn of stock market which signals the start of a recession is inevitable sometimes during the next three years of Trump’s term. Most experts that I respect think we will be okay through 2018, but after that it is anyone’s guess.
If Trump survives long enough to see it, I don’t think he will like “owning” the market when stock prices really plummet. He has been crowing that it is his policies, and that fact that he is president, that has caused stock prices to climb constantly upward so he now owns this stock market. While when the coming recession actually hits he and members his administration will try to spin like tops, he will not be able to escape the only logical conclusion that it is his policies and his presidency which caused the market to tank. If you think his job approval numbers are low now, wait until Trump faces a recession.