In trading there are a few givens and most of what actually passes as investment knowledge is either myth, crap that someone has pulled out of their arse or a combination of both. However, there is one fact that is incontrovertible – markets go up and markets go down. It has been this way since markets began trading and it will continue to be this way until we now longer have markets. This is something that those who say cryptocurrencies as the second coming have found out the hard way. However, more traditional markets are not immune from the same magical thinking and part of the difficulty is that the majority of people who commentate on markets have been around for five minutes and dont simply understand how the real world works. The joy of being old is that nothing is surprising because you have seen it all before.
Equity markets around the world are currently pulling back as is to be expected. Sooner or later the near linear run of the US would falter this is simply a given. Nobody knew when and nobody knows how much but there will undoubtedly be people saying I told you so. Say the same thing for long enough and if you live long enough you are bound to be correct. But as with most things to do with markets context is everything and whilst people are losing control of their bowels over the size of the current reversals in absolute point terms things look a little different when viewed in relative terms. The chart below provides some of that long term context. I have looked at the weekly returns for the S&P 500 since 1950 – so i have a good slab of data. The dates dont matter, look at the quanta and frequency of moves instead. In doing so you will see something blindly obvious – markets have periods where they go down. If you click on the chart it will open in a separate window.
You can see that the current slippage is quite mild in relative terms and such moves could be called common. The next chart offers a little more fidelity in that it looks back 20 years to 1997. As such it includes the tech wreck and the GFC.
The final chart covers the last decade and it offers the interesting perspective in that 2016/17 were somewhat of an aberration as falls were somewhat limited.
However, it should be noted that the aberration is not that the market is pulling back but rather that it didn’t pullback to any great degree in the past year. Given the short term memory issues that traders have it has primed everyone to believe that markets dont go down. Hence the current hysteria over the market coming off an extraordinary run. So the eternal question is – will it continue and the only sensible answer is I have no idea. All I know is that price will do whatever price wants and my opinion is meaningless and will have no bearing on events at all.