Some thoughts on time, change, and why Wall Street thinks stocks are ripe for a selloff
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(bear with me, this is gonna be a riff and my dog is misbehaving)
When people start crowing about the potential for stocks to fall, it's usually for four reasons:
1) stocks have risen a lot
2) too much time has passed without a drop
3) the market doesn't match what we're seeing in the economy and earnings
4) things just don't feel right
1) stocks have risen a lot
2) too much time has passed without a drop
3) the market doesn't match what we're seeing in the economy and earnings
4) things just don't feel right
I'm gonna talk about 1 and 2.
CHANGE.
Usually, stocks don't go up in a straight line. They zig-zag. So when stocks rally at a strong pace, people tend to get worried that the next big drop is around the corner.
Usually, stocks don't go up in a straight line. They zig-zag. So when stocks rally at a strong pace, people tend to get worried that the next big drop is around the corner.
It's a fair concern right now, especially because the S&P 500 has rebounded about 75% since March without a drop of at least 10% mixed in there.
That's a super strong rally. If the market peaked today, it'd be the eighth-strongest rally between drops of 10% or more since 1950.
That's a super strong rally. If the market peaked today, it'd be the eighth-strongest rally between drops of 10% or more since 1950.
(p.s. there have been 32 drops of 10% or more over that time frame)
The counter-argument here? Stocks fell a lot in Feb-Mar 2020, and they fell fast. Also fair.
TIME.
Last year, the S&P 500 fell 34% in a month. It reversed course on March 23 and made a new record high in August.
That's the second-fastest bear market recovery in recent history, and stocks have been unusually resilient since then.
Last year, the S&P 500 fell 34% in a month. It reversed course on March 23 and made a new record high in August.
That's the second-fastest bear market recovery in recent history, and stocks have been unusually resilient since then.
It'd be unusual not to see a drop of 10% or more sometime soon, though (according to history).
The S&P 500 has gone through 10 drops of 20% or more since 1950 (excl. the last one).
In 9/10 of those bears, the S&P 500 went through a >10% drop in either 1) the push back to new highs or 2) the year after reaching new highs.
In 9/10 of those bears, the S&P 500 went through a >10% drop in either 1) the push back to new highs or 2) the year after reaching new highs.
Going by that logic, it's likely we see stocks stumble in a big way sometime soon IF history is any guide (big if).
So when your old Wall Street friends are moaning about why stocks haven't fallen yet, those trends are probably what they're referring to.
BUT. Don't fret.
Selloffs can be a good thing if you're prepared for them and know what you're dealing with.
Selloffs can be a good thing if you're prepared for them and know what you're dealing with.
Also, it's notoriously hard to say when a selloff will happen because the market's a crazy thing and it sometimes defies logic.
So don't base your investing on when you think stocks will fall.
They might never fall again!*
*they probably will
So don't base your investing on when you think stocks will fall.
They might never fall again!*
*they probably will
If you want to read more about selloffs, here's a little thing I wrote on quick, momentum-driven selloffs (when I was in a less tired state of mind):
https://twitter.com/callieabost/status/1310618596490571777?s=20
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