Watch Out for This When the Market Drops

Transcript

Ken Fisher:

So, in media you hear a lot of discussion about corrections, and that's kind of often just, kind of, skimmed over and then, you know, some pundit will be saying—oh, I think there's a correction ahead or—you know, what we're in is a correction or—la la la la la la la la la. So, a correction, in technical jargon, is a drop in the big broad market—most commonly thought of as the S&P 500— that's more than 10% and less than 20%. Something bigger than 20% is considered a bear market, and a drop that's less than 10% is considered normal volatility. Now, I just want to point out that 10 and 20 here are normal industry jargons that are arbitrary lines in the sand.

Said another way, the difference between 9.5 that would technically—down 9.52— would technically not be considered a correction, and down 10.5, that would technically be considered a correction, is a distinction without a real meaning, because you get a 1% move like that intraday. Corrections as opposed to bear markets— I mean, I make the same point on the 20 side—the difference between down 19 and down 21 is not really all that significant a difference. You know, it's just volatility. But we have these arbitrary lines in the sand of what we call a correction and what we don't. Down more than 20, bear market. Down 10 to 20, correction. Down, but not down as much as 10, normal volatility. Corrections come for any reason or no reason—they don't signify economic weakness or strength or anything else. They almost always have a scary story, or sometimes 2 or 3 of them. They come real fast. Corrections kind of come out of nowhere off of a peak and go woo—and that makes them real scary— and then they tend to come back about as fast as they disappeared.

They commonly have a "v"-like pattern. Not a perfect "v" always, but a "v"-like pattern. Every once in a while, they have a "w" pattern, but the reality is they tend to be short, sharp, go away about as fast as they came, have one or maybe three really scary stories which after it's over, end up seeming to be unimportant and/or were totally false, but at the time seemed sensational and hard to disprove, and are really just swings in sentiment. I want to talk about sentiment for a minute—I talk about sentiment a lot because it's actually very important to short-term moves in the market. Human emotion can move from being elated to being terrified really quickly. You think of it as an individual person having a night out on the town— I don't drink liquor myself, but, you know, maybe they have a couple of drinks, they're feeling pretty good. They're in town going to some event, as they walk around the corner, there's two thugs with a gun and a knife. They move from elation to terror real fast. But it's really hard to keep ourselves elated for a really long time. It's too draining, and it's also really hard to keep ourselves terrified for a really long time. That's too draining as well.

And when we think of the collective emotion of our culture, it's got a bandwidth of optimism versus pessimism that's hard to break above or below for too long. It doesn't sustain at those levels, it's too fatiguing. The correction takes us to real fast terror, but it's about a phony story, and we can't sustain that, and we get over it and we bounce back real fast. But sentiment is parallel to the concept of the demand for owning equities or the demand for owning risky securities. And—demand, being defined, in theory, as the eagerness to own, eagerness being an emotion— it's just a measure of emotion, sentiment is a measure of emotion about the eagerness to own or not own. And what corrections do is they get you from being where you were pretty optimistic to pretty terrified, pretty fast, and then they go away. And that resets the clock because—for a bull market—because people everywhere hate losses much more than they love comparable-sized gains.

Behavioralists proved this a long time ago. A buddy of mine and I proved that Europeans hate losses relative to gains more than Americans. Much of the world, no one's really ever measured very precisely, but we use the American methodology on on the British and Germans and found that they were more loss averse than Americans are. So the down move of the correction resets sentiment down low. And even though you get the same move back up, that doesn't take the emotions up as high, providing a lower base for the next leg of the bull market. Should you worry about it? I wouldn't worry about it too much. I wouldn't worry about it any more than you worry every night about somebody breaking into your house. Of course, breaking into your house is more serious than a correction because a correction comes and goes and somebody breaks into your house, they might not go, and there could be a lot of other untoward effects. But the point that I'm wanting you to see is that corrections come with a crazy set of stories. You can't predict them. I'm unaware of anyone who's ever had any consistent history of predicting corrections. If you can't predict them, you shouldn't worry about them. Things you can't predict are really not something to spend a lot of time worrying about. Do you want to worry about your portfolio, and that it's structured right, and that you own the right kind of things, et cetera, et cetera? Yes—worrying in a more modified view could be refined as thinking seriously, looking at risks versus rewards.

But worrying about something that can't be predicted and that isn't actually a real intermediate- to-longer-term effect is just a kind of a pointless task, and I would encourage you not to spend time worrying about corrections. They might come—if they come, you ride them out, soon they're over, let me go a different direction. I'm just going to say this. I've said this for decades. I say it, people never believe it. I mean, I remember in my 1987 book, The Wall Street Waltz, I wrote this, and that's decades ago. Bull markets, with only the rarest of exceptions that don't really matter, end with a whimper, not with a bang. They roll over slowly at first, descend gently in their early days with volatility, of course. And the first, roughly one third of the drop, takes up two thirds of the total length in time of the bear market, and the last one third of the time makes up about two thirds of the percentage drop. They start gently.

In the early days of a real bear market, most people think the bull market is ongoing and they're wanting to pour more money in—and that which I call "The Great Humiliator", the stock market, is sucking people in to take them down into the depths that will terrify them and cause them to have bought high and sold low. But a correction is unlike that. Corrections come straight off the top, and anything that comes straight off the top you do not sell out on. Bear markets start with a whimper, not with a bang; corrections start with a bang. Thank you for listening to me. I hope this was beneficial for you. I've always loved doing these and I look forward to the next one that I can do with you.

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