This stock market certainly looks good, with positive developments supporting confidence. Four popular items are:
&l;/p&g;&l;ol&g;&l;li&g;The Federal Reserve&a;rsquo;s new &a;ldquo;patience&a;rdquo; policy&l;/li&g;
&l;li&g;Economists&a;rsquo; no-nearby-recession assurances&l;/li&g;
&l;li&g;A potentially favorable U.S.-China trade-and-tariff agreement&l;/li&g;
&l;li&g;Stocks&a;rsquo; desirable returns, steadily earned&l;/li&g;
&l;/ol&g;&l;strong&g;So, why should the market decline?&l;/strong&g;
Those four popular drivers, above, are, well, &l;em&g;too&l;/em&g; popular. There is little surprise left, and the good news is built in. Even the expectations about the unresolved trade-and-tariff issues lean to positive outcomes.
On the negative side, there are many uncertainties and risks not widely discussed. Even last quarter&a;rsquo;s bear market now seems irrelevant, given this year&a;rsquo;s notable market gains.
(Fortunately, &l;em&g;Barron&a;rsquo;s&l;/em&g; reminds us that the two market periods are linked. This week&a;rsquo;s article, &a;ldquo;&l;a href=&q;https://www.barrons.com/articles/stocks-sprint-to-best-start-in-28-years-51551492651&q; target=&q;_blank&q;&g;Stocks Off to Best Start in 28 Years&l;/a&g;,&a;rdquo; includes the subhead, &a;ldquo;Market jumps 11% in January and February, following its worst December since 1931.&a;rdquo;)
&l;strong&g;&l;em&g;Incorrect view of today&s;s stock market (too limited)...&l;/em&g;&l;/strong&g;
&l;a href=&q;https://blogs-images.forbes.com/johntobey/files/2019/03/2019-03-01-Index-perf-ST.jpg&q; target=&q;_blank&q;&g;&l;img class=&q;size-full wp-image-6333&q; src=&q;http://blogs-images.forbes.com/johntobey/files/2019/03/2019-03-01-Index-perf-ST.jpg?width=960&q; alt=&q;&q; data-height=&q;600&q; data-width=&q;900&q;&g;&l;/a&g; Index performance comparison from Jan 1, 2019
&l;strong&g;&l;em&g;Correct view of today&s;s stock market (includes tariff reactions, all-time highs and bear market from which this year&s;s stock market emerged)...&l;/em&g;&l;/strong&g;
&l;a href=&q;https://blogs-images.forbes.com/johntobey/files/2019/03/2019-03-01-Index-perf-IT.jpg&q; target=&q;_blank&q;&g;&l;img class=&q;size-full wp-image-6332&q; src=&q;http://blogs-images.forbes.com/johntobey/files/2019/03/2019-03-01-Index-perf-IT.jpg?width=960&q; alt=&q;&q; data-height=&q;600&q; data-width=&q;900&q;&g;&l;/a&g; Index performance comparison from Jan 1, 2018
Think of today&a;rsquo;s situation as one of those periods when the market&a;rsquo;s rise implies that fundamentals are good and risks are small. The problem is the negative possibilities are alive and well.
It is this market-driven confidence that can produce an opportunistic decline. All the market needs is a gentle push &a;ndash; down &a;ndash; to produce the search for the reasons why, thereby bringing to the forefront those many possible negatives.
&l;strong&g;How big a drop should we anticipate?&l;/strong&g;
In a normal market, we could expect to see a 5% market dip (accompanied by variously timed, individual stock dips of 5% to 10%). However, this market is not normal. Investors will likely be quick to recall the bear market&a;rsquo;s distress and the slowing economy concerns that led to discussions of recession. Without the support of a rising market, the mood could turn worrisome, meaning a larger decline is likely.
Additionally, the market&a;rsquo;s steady rise (like what we saw preceding the bear market selloff) produced a pattern without clear, downside support levels. Add to that technical void the fact that many stocks have not yet cleared upside technical barriers, and a small decline could become a downside omen.
Therefore, a more likely drop would be a 10% market correction (individual stocks, 10% to 20%).
&l;strong&g;The wild card: What if the drop&a;nbsp;is based on fundamentals?&l;/strong&g;
The one, major, overriding, critical assumption made above is that the economy&a;rsquo;s growth rate will not slow further, and that today&a;rsquo;s risks will not become reality.
We currently are getting the slower growth economic reports foreseen by the stock market last quarter. The problem is a market drop at this time would trigger the concern, &a;ldquo;Is the stock market beginning to anticipate more slowdown ahead?&a;rdquo;
&l;strong&g;The bottom line&l;/strong&g;
Articles have suggested that the stock market now needs a catalyst to continue rising. But what if the market, without a catalyst, dips? As the search for &a;ldquo;why the dip?&a;rdquo; reasons brings forth negative uncertainties and risks, that dip could end up serving as the catalyst for a larger stock market decline.
A 10% correction seems likely, providing an attractive buying opportunity.
However, a deeper decline is possible (likely) if more growth slowdown is seen and/or some of the uncertainties/risks are viewed as more probable.
Hopefully, as the decline unfolds, there will be signs, perhaps contrarian indicators, to guide us.
&a;nbsp;
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