What To Do About The Upcoming Trump Correction?

by: Neal Frankle, CFP

Summary

There are plenty of good reasons to worry about a market correction - it's inevitable.

When you think about market corrections, you probably go back to 2007. In reality, corrections happen yearly.

Your best course of action is to keep your fears to the side, watch what the market is saying, and follow that advice.

Some investors are anxious about markets right now. You might be one of them. Equity indexes are reaching new highs almost on a daily basis and lots of smart people out there know it can't continue indefinitely. And if you don't like President Trump, you might be especially jittery because he seems so unpredictable.

Even if you like the President, you have to admit that corporate earnings have been outpaced by stock prices for years. And the market's euphoric rise directly after the election only made this issue more pronounced.

Sure, the changes President Trump seems to champion (like infrastructure spending, tax simplification and regulation cuts) would stimulate the economy. But if those initiatives take longer than expected to implement, the market could be in trouble.

If you look at all this taken together, you can make a pretty good case that humpty-dumpty market might be ready to fall off the wall.

Is it all doom and gloom?

No. It's likely that the new administration will be able to lower taxes, cut regulations and pump up some infrastructure spending in the near term. And it's also undeniable that the economy is relatively strong and corporate profits are growing. If these are all true, that should support a stronger market.

So, which is it? Continued upswing or nasty correction?

Why it's both of course. The market might continue to rise in the short term, but sooner or later it will drop. That is certain. The only thing we don't know is when and how much. But is this really news?

According to the Investor's Business Daily, there is a 3 out of 4 chance that the market will drop intra-year by 10% or more. That's true for this year - and it's been true since the market first started operating. Fortunately, most of these historic drops were event-driven and short-lived. That's no guarantee of the future of course, but it's historically true.

Take a look at the chart below:

The gray bar shows how the market performed for the entire year. The red dot shows each period's intra-year drop. The median drop is a whopping 13% per year. When I look at this chart, it tells me that markets have always been volatile. It also tells me that corrections are natural. Investors forget all but the most calamitous market drops (1987, 2001 and 2008) and they often worry that the next drop will equal those terrifying experiences. They could be right of course, but the odds are against it.

Sometimes it takes decades for the market to regain its former glory. But in the vast majority of cases, it doesn't.

When you look at the facts, you can see that, if anything, it's ridiculous to expect the market NOT to drop in a meaningful way. When it happens, don't be surprised. That's true for this year and every year thereafter. That might be a problem for short-term traders (or an opportunity), but it shouldn't be a problem for long-term investors.

The coming correction might get pinned on President Trump or a dozen other causes. If you are already unhappy with the current administration, this might fan your fear and push you to take extreme action to allay your emotions.

My best advice is to keep your politics and your money is two different places in your mind. Yes, Mr. Humpty Dumpty Market will fall off the wall sooner or later. But the market will surely put Dumpty together again.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.