My last article was titled "We're Due For a Good 10% Correction." I was basically correct in saying that the market was going to drop 10% and then likely bounce back up within a few months. In the last half of 2007, the Dow did exactly that, twice actually. From July 13, 2007 to August 17, 2007, we slipped 6%, then we bounced back up and got ready for round two.
From October 12, 2007 to November 23, 2007 the Dow slipped 8%, but if you count intraday values, we actually touched a 10% correction threshold. And like clockwork, we bounced back up to 13625 on the Dow by December 7, 2007. We were all set to close out the year on a pleasant note, but alas it was not to be. Recession fears abound and the Dow is recently tracking down at an accelerated pace, hitting lows we have not seen since April 2007.
The reason for this is quite evident. We are actually in a recession. People are slowly starting to realize this. In the future we will come to recognize it as a sort of 'oil shock induced hybrid' recession. I say hybrid not only because it is all the rage in autos this year, but because there are many other lesser factors besides high oil prices which are to blame. For example, the U.S dollar, commodity prices, high growth in foreign markets, etc.
20% Drop is the Magic Number
What we can expect next is a likely repeat of the kind of recession we saw in in the years 1980, 1981 an 1990. These too were cause by high or volatile oil prices. As far as recessions go, these ones were a breeze lasting only 6 months, 16 months and 8 months respectively. And a very interesting note is that in all of these recessions the Dow dropped 20% from its previous high. In some cases it stayed at the low for a few months, and other times it just touched a low for about a week, but 20% was the magic number.
I feel quite confident that 20% will be the magic number once again. Within the next few month the Dow will decrease by another 1300 point and we will likely hit 11200. As I said in my last article, "This is normal – this is common – this is necessary."
Beware the Mega-Drop
In another possible scenario, aided by the rampant market speculation occurring in China and other emerging markets, we may see a global case of panic selling. In this scenario the magic 20% is still valid, but instead of taking several months to occur it may happen in a matter of days. Any number of potential catalysts could induce a massive drop in the Dow of 500 to 600 points (maybe more) in one day. For example, a crisis in China or Hong Kong (panic selling or other) could result in a massive drop in the overheated Asian markets and force cover selling in U.S equities.
I am sure we can all agree that these are highly volatile times where news, or even the lack of news, can lead to wild gyrations in stock values. However, over the next year things should start to settle, just as they always have; as Abraham Lincoln once said, "this too shall pass."