Something

I was asked the other day by a client if I thought the stock market was going to crash.  This is what I said about that in my most recent investment letter to clients:

"Investors decided in mid-December that their economic projections were too optimistic.  They went into risk-off mode and have sold every rally since then. But this change in market sentiment shouldn’t be confused with a crash. The financial press needs headlines to grab attention.  The return of market volatility since 2015 is a great way to get those eyeballs back watching CNBC or reading the papers.  I’ll define a market crash, as when an unexpected event catches too many investors on the wrong side of the market.   Something important to note is that you usually need a catalyst for that to occur.  That’s usually an unexpected event washing up over the transom that has everybody looking for an exit all at once. Typically these events also resonate well beyond Wall Street.  In 2008 it was the banks, in 2000-01 it was the events around the terrorist attacks and the bursting of the dot.com bubble. Market sentiment may have changed, but so far we’re seeing a pretty typical correction in stocks, not the sort of far reaching event that historically has led to a catastrophic event for stocks.  That’s not to say that stocks can’t decline further, but again a true financial crash is still by our work a low probability event absent that unexpected catalyst.  Even the flash-crashes we’ve seen in the past few years have had more to do with short term issues that have righted themselves almost right away. "

If you define a "crash" as a 1929, 1987 or October 2009 event then we've clearly not had something like that.  Nor have we had an event like the two flash crashes we saw last year and in 2010.  But with all that said, it's hard not to say we've not had "something".  Call it a nascent bear market or a correction.  You can call it a resetting of expectations or whatever, but markets are down big in the past three months.  The S&P 500 has seen about 14% lopped off its value in the last 10 weeks.  The majority of that loss came in the first two weeks of the year.  Those two weeks wiped out most of the market's gains going back to early 2014 and something like a trillion dollars of net worth.

This of course is what usually happens when markets enter a "risk off" mode.  The old saying "markets take the stairs as they march higher and the rapid descent of the elevator lower" certainly applies to what we've recently seen.  The average decline in a correction is something like 14% so by that moniker we're right on par.  But don't tell me we haven't had "something".  We'll monitor our indicators for clues as to see what that "something" brings next.