Sharp Corrections, Bear Markets And Stock Market Crashes Will Happen Again

Paul Franke profile picture
Paul Franke


  • The U.S. stock market is overvalued on most every long-term fundamental metric.
  • Rising inflation and interest rates during 2017 would be bad news for stock pricing.
  • The Republican push for trade protectionism could torpedo the economy and stock market.
  • Hedged portfolios and greater cash levels may prove an intelligent strategy for the rest of 2017.

Don't kid yourself. New investors in the U.S. stock market the last couple of years need to understand stock portfolios could be hit by large losses in the not too distant future, if not hedged and diversified properly. Risk does happen, has happened and will continue to happen in the markets. I have been investing for a little over 30 years, with the 1987 stock market crash decline of 40% over six weeks being one my first experiences with a macro-type sell-off.

Pictured below is a quick recap of the major double digit Dow Jones Industrial Average drawdowns in price since 1986, the year I started investing, measured from intraday high to intraday low. Nearly every drop has been blamed on either rising interest rates (changing discount rates on business earnings) or fears/reality of slowing economic activity, or both. 2017 could be another - or both - year, if inflation rates continue to climb and trade protectionism demolishes the U.S. economy.

I counted 24 instances of a drop of at least 10% the last 30 years. The mean average drop is -17.7% over 11.2 weeks, the median is -17% over eight weeks. Statistically, a 17% decline in the Dow Industrials from last week's high would take us back to 17,500, the same level as a year ago or September 2014.

What are the reasons to be cautious?

Many of the biggest, scariest and most upsetting drops actually occur during periods of Republican control over Washington, rare instances like today when both the executive and legislative branches of government are held. Famed investor Mark Yusko of Morgan Creek has been pushing this idea on his Twitter account and other places. For example, the 2017 equity market setup with Republicans stepping to power is quite similar to the 1929 situation, just before the 1930s

This article was written by

Paul Franke profile picture
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of January 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

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.

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