The Odds of a 50% Stock Market Correction

In a few words, the probabilities are likely pretty low.

My own opinion was that we (meaning readers, investors and I) would likely see a 20% – 25% correction in the SP 500 at some point in 2022 thanks to the pending removal of all the excess liquidity that Jay Powell is now forced to deal with, but 50% would be pretty extreme, or even 40% for that matter.

Statistically, if you look at the returns on the SP 500 exiting WWII, between 1945 and 1999, there had been only one 50% correction and that was in 1973 – 1974, and that was due in part to the OPEC Oil Crisis, America’s first taste of $3 a gallon gasoline, Watergate and it’s own constitutional crisis leading to Richard Nixon’s resignation in August, 1974, Vietnam, inflation and the Nixon Administration’s WIN or Whip Inflation Now policies (which – in hindsight – were a total bleeping disaster). It was a decade of one disaster after another culminating in the Iranian hostage crisis in the late 1970’s.

That was a 55 year stretch with just one 50% correction in the SP 500.

Then we had the decade from 2000 to 2009, where remarkably we saw two 50% corrections in the SP 500, for completely different reasons, i.e. large-cap growth and tech collapse and then the housing credit collapse.

However much of the the negative sentiment you see and hear today are investors who survived the decade from 2000 to 2009 and those bear markets. I think to some extent they are fighting the last war so to speak.

Summary / conclusion: While it was surely a coincidence since no one at CNBC really cares what shows up on this blog, (I wouldn’t think), the Monday after the above link was posted on a possible recurrence of 2000 to 2002 50% correction since the mega-cap and growth set-up was so similar to 1999, CNBC’s FastMoney had Dan Suzuki, a strategist at Bernstein Advisors on the show and he said he expected a 50% correction for the SP 500 in 2022.

I wonder if Dan knows the history of the last 75 years.

Dan could be right: I would think it would take a very nasty bond market to trigger a 50% correction, and even if the 10-year Treasury yield traded up to 3% it would only equal two such occurences – the end of 2013 and then the end of 2018 – where the 10-year Treasury yield flirted with 3% in the last 10 years.

If the 10-year Treasury yield would manage to trade cleanly through 3% and move higher, the stock market would definitely have a problem (in my opinion).

Anyway, opinions are like (you know what) – everybody has one. Take everything you read on this blog with a grain of salt.

We have a whole generation now of American investors who saw the equivalent of their grandparents Great Depression in 2008.

Thanks for reading.

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