Sharp Corrections, Bear Markets And Stock Market Crashes Will Happen Again

Sharp Corrections, Bear Markets And Stock Market Crashes Will Happen Again

The U.S. stock market is overvalued on most every long-term fundamental metric.

Rising inflation and interest rates during 2017 would be bad news for stock pricing.

The Republican push for trade protectionism could torpedo the economy and stock market.

Hedged portfolios and greater cash levels may prove an intelligent strategy for the rest of 2017.

Don’t kid yourself. New investors in the U.S. stock market the last couple of years need to understand stock portfolios could be hit by large losses in the not too distant future, if not hedged and diversified properly. Risk does happen, has happened and will continue to happen in the markets. I have been investing for a little over 30 years, with the 1987 stock market crash decline of 40% over six weeks being one my first experiences with a macro-type sell-off.

Pictured below is a quick recap of the major double digit Dow Jones Industrial Average drawdowns in price since 1986, the year I started investing, measured from intraday high to intraday low. Nearly every drop has been blamed on either rising interest rates (changing discount rates on business earnings) or fears/reality of slowing economic activity, or both. 2017 could be another – or both – year, if inflation rates continue to climb and trade protectionism demolishes the U.S. economy.

I counted 24 instances of a drop of at least 10% the last 30 years. The mean average drop is -17.7% over 11.2 weeks, the median is -17% over eight weeks. Statistically, a 17% decline in the Dow Industrials from last week’s high would take us back to 17,500, the same level as a year ago or September 2014.

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