The short of stock market corrections

Someone strayed to this blog by asking Google "how much the stock market would correct at present". That's a good question! Let's try to answer his/her question at least in part and discuss how big stock market corrections usually are.

Before we do that, let's try our hand in predicting (=guessing) market movements a bit. Some people are afraid of a double dip where the second dip recessionwise would be on its way in the near future. However, I don't believe there will be a second dip even though it is always possible. I believe the fundamentals are so strong that there will eventually be a good surge in stock markets. No later than this fall I'm expecting a good surge, hopefully at least 10 per cent in the stock markets at least in the emerging markets and Asia. I am also hoping there will be a smallish downward plunge during the summer due to low demand in the summertime and fears that the markets are not yet through the rough patch. Therefore I took all the money under my control out of the stock markets for the summer and I am planning to put it back in come fall. So I am hoping to avoid possible 5-10 per cent downward plunge during the summer and benefit from the hopefully at least 10 percent surge between August and January. Usually trade picks up after summer and the economic news are probably by then looking continually better and all this I believe is leading to a little surge! Time will tell if my guessology will hit the mark this time...

Back to the original question. In my observations the corrections in stock markets usually hit the area of 15-30 percent of the highest values. The economic crisis in 2008-2009 was far worse and is a very exceptional and rare occasion. Typically different markets around the world lost 60 per cent of their highest market capitalization and the Russian market really hit the floor. For example the RTS index in Moscow lost about 75 per cent of its value causing total panic also in Russian government. A good reminder for Moscow, I would say, that not everything can be dictated by order of Mr Putin...

The opposite side of the coin here is that if you bought funds investing in Russian stock markets when they had lost 75 per cent of the peak value you would stand to gain 300 percent in profits when they someday reach their previous peak. Even if they don't reach the previous peak the opposite movement is certain after so rapid a plunge and you will certainly make big profits. The problem is guessing when you're close to the bottom, but I did some buying close to the bottom and when a month ago I sold everything, the Russian investment had already doubled in value.

One interesting question is how often do these plunges or crises occur? Based on my observations that would be in the range of 6-10 years, but economists put the length of these business cycles at 5 to 7 year range. That means that peaks as well as crises in stock markets occur every 5-7 years, usually. That also means that now you could probably put quite safely money into some interesting market funds and let them grow in value there for the next 3 or 4 years before the next crisis or correction is at hand. That should be a safe bet. And in any case, usually you start hearing market rumours or negative expectations in the public at least half a year prior to anything happening. So, when you start hearing these rumours more and more, it's time to get out of the market.

About the real business cycles. If my memory serves me right, there was a depression/recession in 1991-1992. The next one I remember was when the dot com bubble burst in around 2000. And then the current crisis started in earnest in 2008. These numbers, if correct, would point to around 8 years between crises.

Now, hopefully these observations will help you to develop your own Guessology ideas of future market fluctuations. I would be interested in hearing YOUR thoughts on the subject!?!