How Deep Will The Stock Market Correction Go?

By Bryan Rich

February 5, 7:00 am EST

We talked this past week about the prospects that a correction was underway in stocks.  Stocks in China, Japan, Germany and the UK were already leading the way.  And with earnings from the big tech giants, I thought any cracks in the armor might give people reason to accelerate the profit taking.

That was the case.  Google (NASDAQ:GOOG) missed on earnings. And Apple (NASDAQ:AAPL) disappointed on guidance.  And the global stock markets were a sea of red on Friday.

Now, markets don’t go in a straight line, there are corrections along the way.  Remember, since 1946, the S&P 500 has had a 10% decline about once a year.  And we haven’t had one in a while. Since the election (in November of 2016), the worst decline in stocks from peak to trough has been only 3.4%.  We’ve matched that now.

Now, it should be noted that this decline isn’t driven by a negative turn in fundamentals, rather it’s driven by profit taking, and (more importantly) the increasing likelihood that a higher growth environment will ultimately allow the central banks in Europe and Japan to exit QE — the remaining instruments of life support for a global economy that has been brought back to life by fiscal stimulus.

With that, as I’ve said, it’s fair to expect a correction until the data begins to prove out the benefits of fiscal stimulus (i.e. when we see first quarter corporate earnings and GDP growth – both of which should be very strong).

Now, as they do, the media wrings their hands over a slide in stocks and tries to find a story of trouble to fit the price.  The reality is, most investors should see a decline in the U.S. stock market as an exciting opportunity. The best investors in the world do. If you are not leveraged, dips in stocks (particularly U.S. stocks – the largest economy in the world, with the deepest financial markets) should be bought, because in the simplest terms, over time, the broad stock market has an upward sloping trajectory.

And when better earnings from tax cuts start coming in for Q1, a lower stock market would amplify the impact of a higher denominator in the P/E ratio — that means stocks could become cheap (er) – maybe something closer to 15 times forward earnings, in a world of (still) low rates.

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