Corrections Are Normal, Bears Are Often Wrong

Unemployment is stubbornly high and the housing market is still a mess-we all know that. Despite these structural problems, the economy has emerged from the recession in 2008, and is growing again-just not as fast as any of us would like. Recent economic data shows the economy is slowing and the market seems to have corrected for this slowing growth in recent weeks. Does this mean the economy is heading back into a recession?

Probably not, Moody’s Economy.com Risk of Recession Indicator currently shows just a 21% risk of the economy going back into a recession in the next six months. We have had eight straight months of job growth, creating 870,000 jobs over the last 12 months, a big change from the 822,000 jobs that were lost in the year before that.

Market corrections and pullbacks are normal occurrences in the stock market. How normal? Over the last 15 years the S&P 500 Index has experienced an average of four pullbacks in excess of 5% and one pullback a year in excess of 10%. So the recent 7% correction during the last few weeks is well within the norm. With the decline in the markets, the slowing economy, and lots of headline risks, it is no wonder that many investors are in a “bearish” mood these days. The recent AAII (American Association of Individual Investors) Investor Sentiment Survey showed that 47% of investors were “bearish” on the market, believing more market losses ahead. “Bearish” investors currently outnumber “Bullish” investors by 23%.

But when the “Bears” outnumber the “Bulls” by that much, they are often wrong. The last seven times that bearish sentiment exceeded bullish sentiment by 20% or more, the market has experienced positive returns over the next six months, with an average return of 22% following the last seven extreme “bearish” periods. Stocks are currently selling at a 24% discount to their historical P/E (Price/Earnings) ratio, so the bears may have overdone the selling again.

If you have any questions at all please do not hesitate to call!

Have a great day!

Bob and the All Star Team