5 ms·

Why was or is the market in need of a correction? What is your evidence for that statement?

by sjg007 7y ago

fny 7y ago
Valuations were continuing to rise parabolically despite slowing earnings and growing debt.
aaomidi 7y ago
At this point every time something positive happens in the market: "It needs a correction" Everytime something negative happens: "It's just a cycle" Maybe we don't have the best economic system where instability is built into its core & foundation?
- jyrkesh 7y ago
  I'm having trouble seeing how those two positions/statements contradict each other. If markets need a correction, and then they get it, that is part of the business cycle. Also, "at this point" is at the point of one of the most runaway bull markets of all time. IMO, the correction has been needed for a couple years now. I didn't have nor did I see that sentiment on HN 5+ years back.
mrgordon 7y ago
I am not the original poster but I think they are expressing that we were ready for some reversion to the mean after many years of gains including a spectacular 2019.
thedance 7y ago
The market has just been unhinged lately, because there are a lot of huge positions that would love to sell but just can't unwind. Consequently there has not been an effective downward pressure on asset prices, and a lot of garbage is overpriced. I still don't expect a major correction here because there's so much underused capital flying around out there and it will pour into anything that looks even remotely like a bargain. We have entered a regime where the world's economies have more capital than they are willing to use, which is novel and weird. Expect markets to act in novel and weird ways. One thing I can easily predict is American governments large and small will take the wrong actions. They will cut taxes and slash spending when the bond markets are begging them to spend more. States and cities should be out there right now selling as many bonds as they can.
- darkwizard42 7y ago
  Huh, this was a ton of speculation in 3 paragraphs. Could you expand on what are the huge positions that are looking to sell? Are there any examples of overpriced equities? I think your second paragraph makes sense given some large cap companies holding so much cash on hand due to inability to find anything useful to invest in (and stock buybacks)./
Vesuvium 7y ago
It's widely known state of things because of the current situation (low interest rates for very long time, etc.). Infact, many financial institutions and experts have been of the idea that a major stock crisis was around the corner for a while. You could argue that most would have disagreed, but at the end 2018 many stock crisis indicators, models and statistics started to turn red and indicate that a crash was close. 2019 had a couple of close calls like the Turkish lira crisis, but there was never widespread panic to feed a worldwide crash. Now there is.
bumby 7y ago
Take this with a train of salt because I’m not an economist, but one of the most often touted general points of the need for a correction is the cyclically adjusted price to earnings ratio being elevated [1]. In other words, stocks are more “expensive” and thus ripe for a correction https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
- omgwtfbyobbq 7y ago
  Definitely, especially in light of a probable recession. One possible enhancement to the PE ratio I've read about that seems really helpful is to make it after tax, since the tax rate on companies can vary depending on locality and time.
- read_if_gay_ 7y ago
  > train of salt Nice Freudian slip.
  - bumby 7y ago
    Oops, my phone is not optimized for my cro magnon fingers...
    - AnimalMuppet 7y ago
      Don't apologize. It was a beautiful typo. In fact, I may steal it for deliberate use...
- jfengel 7y ago
  Note that that's the Shiller P/E ratio, which (even after today) is still at 26, which is quite high. The regular P/E is still only around 20, which is at the upper limit of reasonable. The whole point of the Shiller ratio is that it's supposed to do a better job predicting overheated markets, and it may well be doing that here. The regular ratio is based on recent earnings, which will be uncharacteristically high during a bull economy. That's not to say it's incorrect. I was just noting that your link indicated a higher value than I was expecting, and that's why. (It implies that the market could easily fall another 25% before reaching reasonable territory.)
cm2187 7y ago
High P/E ratio, bearish fixed income market, companies unable to deploy capital and buying back stocks to sustain bull market, QE being drained out, etc. Lots of warning signs that we are at the top of the cycle.
Kluny 7y ago
I don't know about "need" and I'm no kind of expert, but it seems to me that there's a hard drop roughly every ten years or so and the last one was 12 years ago. I've only been in the market myself for about 15 years, so I don't know that I have the instincts to call it, but historically this seems to be true.
mdorazio 7y ago
Plot a basic best fit line for the DJIA or S&P 500 over the last 30 years and see where it says we should be in a rational market (about another 10% below today). If you need more evidence, plot a second line showing GDP growth for comparison. The markets have been in an unprecedented situation for the last decade since the Fed cut rates to the bone and then left them there. Effectively, money has been so "easy" that all kinds of weird things have been happening to boost the markets without much actual underlying structural support (actual capital investment, median wage growth, GDP output, etc.).

Why was or is the market in need of a correction? What is your evidence for that statement?

by sjg007 7y ago

Why was or is the market in need of a correction? What is your evidence for that statement?

fny 7y ago

Valuations were continuing to rise parabolically despite slowing earnings and growing debt.

aaomidi 7y ago

At this point every time something positive happens in the market: "It needs a correction" Everytime something negative happens: "It's just a cycle" Maybe we don't have the best economic system where instability is built into its core & foundation?

jyrkesh 7y ago
I'm having trouble seeing how those two positions/statements contradict each other. If markets need a correction, and then they get it, that is part of the business cycle. Also, "at this point" is at the point of one of the most runaway bull markets of all time. IMO, the correction has been needed for a couple years now. I didn't have nor did I see that sentiment on HN 5+ years back.

mrgordon 7y ago

I am not the original poster but I think they are expressing that we were ready for some reversion to the mean after many years of gains including a spectacular 2019.

thedance 7y ago

The market has just been unhinged lately, because there are a lot of huge positions that would love to sell but just can't unwind. Consequently there has not been an effective downward pressure on asset prices, and a lot of garbage is overpriced. I still don't expect a major correction here because there's so much underused capital flying around out there and it will pour into anything that looks even remotely like a bargain. We have entered a regime where the world's economies have more capital than they are willing to use, which is novel and weird. Expect markets to act in novel and weird ways. One thing I can easily predict is American governments large and small will take the wrong actions. They will cut taxes and slash spending when the bond markets are begging them to spend more. States and cities should be out there right now selling as many bonds as they can.

darkwizard42 7y ago
Huh, this was a ton of speculation in 3 paragraphs. Could you expand on what are the huge positions that are looking to sell? Are there any examples of overpriced equities? I think your second paragraph makes sense given some large cap companies holding so much cash on hand due to inability to find anything useful to invest in (and stock buybacks)./

Vesuvium 7y ago

It's widely known state of things because of the current situation (low interest rates for very long time, etc.). Infact, many financial institutions and experts have been of the idea that a major stock crisis was around the corner for a while. You could argue that most would have disagreed, but at the end 2018 many stock crisis indicators, models and statistics started to turn red and indicate that a crash was close. 2019 had a couple of close calls like the Turkish lira crisis, but there was never widespread panic to feed a worldwide crash. Now there is.

bumby 7y ago

Take this with a train of salt because I’m not an economist, but one of the most often touted general points of the need for a correction is the cyclically adjusted price to earnings ratio being elevated [1]. In other words, stocks are more “expensive” and thus ripe for a correction https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe

omgwtfbyobbq 7y ago
Definitely, especially in light of a probable recession. One possible enhancement to the PE ratio I've read about that seems really helpful is to make it after tax, since the tax rate on companies can vary depending on locality and time.
read_if_gay_ 7y ago
> train of salt Nice Freudian slip.
- bumby 7y ago
  Oops, my phone is not optimized for my cro magnon fingers...
  - AnimalMuppet 7y ago
    Don't apologize. It was a beautiful typo. In fact, I may steal it for deliberate use...
jfengel 7y ago
Note that that's the Shiller P/E ratio, which (even after today) is still at 26, which is quite high. The regular P/E is still only around 20, which is at the upper limit of reasonable. The whole point of the Shiller ratio is that it's supposed to do a better job predicting overheated markets, and it may well be doing that here. The regular ratio is based on recent earnings, which will be uncharacteristically high during a bull economy. That's not to say it's incorrect. I was just noting that your link indicated a higher value than I was expecting, and that's why. (It implies that the market could easily fall another 25% before reaching reasonable territory.)

cm2187 7y ago

High P/E ratio, bearish fixed income market, companies unable to deploy capital and buying back stocks to sustain bull market, QE being drained out, etc. Lots of warning signs that we are at the top of the cycle.

Kluny 7y ago

I don't know about "need" and I'm no kind of expert, but it seems to me that there's a hard drop roughly every ten years or so and the last one was 12 years ago. I've only been in the market myself for about 15 years, so I don't know that I have the instincts to call it, but historically this seems to be true.

mdorazio 7y ago

Plot a basic best fit line for the DJIA or S&P 500 over the last 30 years and see where it says we should be in a rational market (about another 10% below today). If you need more evidence, plot a second line showing GDP growth for comparison. The markets have been in an unprecedented situation for the last decade since the Fed cut rates to the bone and then left them there. Effectively, money has been so "easy" that all kinds of weird things have been happening to boost the markets without much actual underlying structural support (actual capital investment, median wage growth, GDP output, etc.).