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The Market Will Probably See a Correction, but Don't Bet on When

By Motley Fool Staff - Apr 29, 2017 at 11:21AM

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A correction might be coming in the next decade or two, but investors shouldn’t try to time when it'll happen or how bad it'll be.

According to more than a few financial news sources and research notes, a correction in the market is likely going to happen in the next 10 to 20 years.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann explain why the experts are saying the market will correct, and how likely they are to be right; why it's so hard to predict what the market will do in the short term; how often even professionals get this kind of thing wrong; and why it's so hard to time the market.

A full transcript follows the video.

This video was recorded on April 21, 2017.

Dylan Lewis: I will lay out the argument for why there's probably a correction coming at some point in the next decade to 20 years, and what the financial media narrative has been. For people that aren't familiar, basically, the gist of it is, because of quantitative easing, which is basically the Fed getting money into the economy, making borrowing very cheap, interest rates have been historically low. They've been historically low for a very long amount of time. Because of those low yields, investors have been pushed into equities because they're looking for better returns. That demand drives up stocks into overvalued territory. That's what we see, that's the gist of all of these research notes that are saying the market is overvalued. Really, that line of thinking totally makes sense to me. My college economics coming back, I totally see the dots connecting there. And Hunter brings up great points with the data here. Typically, the S&P 500 on a trailing basis, P/E somewhere between 10 and 20. 

The problem, though, is that even if you're right with what your thesis is, when it comes to market timing and deciding, "I'm going to wait three months to do anything," or, "I'm going to sell now because it seems like we're at peaks," is you have to be right not only about the thesis, but you have to be right but the timing and when you act on it, and it's really tough to nail both of those things.

David Kretzmann: It's really tough. There are some interesting dynamics at play, and it's incredibly difficult to predict where the market is going in the short term. You have a lot of experts from the International Monetary Fund, the IMF, and high-ranking economists who were predicting before Brexit and the U.S. election that if Britain leaves the EU, and if Donald Trump is elected president, there's a very high likelihood that the market will crash. And lo and behold, the market is hitting new highs as a result. It's also interesting to look at what Warren Buffett has been doing. We traditionally see Buffett as more in that value mode as an investor. Between the U.S. election of Trump and early February, he was a net buyer of stocks. He bought over $20 billion of stocks, including Apple, which has been an incredible performer, and driving a good chunk of the returns of the S&P 500 this year. If a correction was coming, if a crash was coming, Buffett would be the last person I would expect to be buying stocks, because he tends to be a more conservative investor.

To your point, Dylan, I think it's a great point, looking at interest rates. Interest rates are at historic lows. We haven't really navigated through prolonged periods of such low interest rates. When looking at investments, you have to look at the alternatives. If you're not going to invest in stocks right now, where are you going to invest? The U.S. Treasuries or bonds are yielding 2% to 3%, 10-Year Treasuries, which is very low. So, that's not very attractive. You could put it in your savings account, maybe 1%, if you're lucky, or less. So, you have to look at the alternatives. So, it's understandable to see why people are looking at the scope of investment possibilities right now. And they're gravitating toward stocks, even though, yeah, they look, on average, pricier than they typically have been. But compared to everything else, it still looks more attractive.

Lewis: Yeah. Bringing it back around to some historical examples, Hunter's question reminded me of news that was swirling in early 2016. I'm sure you remember this. There were several big banks, RBS was one, I think Morgan Stanley was another, they put out research notes in January, and they were basically urging their clients to sell stocks. They were saying, "We see these cataclysmic issues coming to the market." It was, again, largely due to quantitative easing stuff with the Fed, low interest rate environments, and what that does to equities over an extended period of time, or else some growth concerns with China at the time. And you look at the run that the market has gone on since January 2016, I think it's up about 20%.

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