All The Reasons Stocks Could Fall - And Why You Shouldn't Care Regardless

Summary

• As Black Friday showed, scary headlines can send even the safest stocks skidding. Just like that, "buying and holding" becomes easier said than done.
• What happened to investors who sold on March 23, 2020, after the market had fallen 34%?
• As long as America endures, the stock market will remain the highest-probability, lowest-risk way of building wealth over time.
• Looking for a helping hand in the market? Members of iREIT on Alpha get exclusive ideas and guidance to navigate any climate. Learn More »

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This article was co-produced with Dividend Sensei.

The stock market is always climbing a wall of worry. And investors who obsess over short- to medium-term macro risks can easily get scared out of owning stocks entirely… even though they’re the best-performing traditional asset class in history. Just consider how the S&P 500 is up 600% since March 2009 – despite all the scary stuff that's happened through mid-2020 alone.

Now, that scary stuff definitely did have an impact on people’s wealth. And, recognizing that, investors hope to sit out the market's worst days to theoretically double or even triple their long-term returns.

Unfortunately, that’s a whole lot easier said than done considering how its best days cluster around its worst. According to JPMorgan, a whopping 80% of the former come within two weeks of the latter.

(Source: Dalbar)

And according to Bank of America, 99.7% of the market's incredible returns since 1926 have been due to the single best days. Miss them, and investing can go from a sure long-term thing to losing 46% of your life savings over 20 years.

Many of us know that in theory. But as we just saw on Black Friday – and to a lesser degree on Tuesday – scary headlines can send even the safest stocks skidding. Just like that, "buying and holding" becomes easier said than done.

We get it. But that doesn’t mean we’re going to stop fighting that urge.

How to Handle Market Selloffs

Consider Johnson & Johnson (JNJ), an AAA-rated Ultra SWAN dividend king that S&P considers the highest-quality healthcare company on earth. There’s arguably no safer dividend stock on earth.

Yet it fell 0.7% in the worst Black Friday since 1931.

Guess how often the market falls 2% or even 3%+ in a single day? Far more often than you'd think, even in raging bull markets like we saw in 2019.

Despite stocks rising 31% – making it their best year since 1987 – there were still five different days where they fell 2%-2.9%. And we can guarantee that plenty of people sold out of them.

Here’s the thing: The market has always risen in the end. And fundamentals have a very, very good track record of prevailing. Yet investors keep making the same mistakes anyway.

Consider everyone who sold on March 23, 2020, after the market’s 34% drubbing in the fastest bear market in U.S. history. Many are still sitting in cash even as the highest inflation in 31 years guts their purchasing power.

We need to get to the place where we cannot just know that time in the market is far more important than timing the market if we want to retire rich and stay rich. We need to apply it too.

Let's consider someone investing an annual $2,000 for the last 20 years.

(Source: Motley Fool)

The difference between the worst possible marketing timing – only buying at the exact tops – and buying at the exact bottoms was 25% better returns than staying in consistently. NOT counting taxes.

After taxes, that's about 0.7% better. And, in case it needs to be stated, nobody has ever managed that kind of perfect prediction. The vast majority of us who try it out come much closer to the exact opposite.

So we end up losing out intensely.

My point is that market timing is something you need to avoid like the plague.

Let’s Discuss the Risks That Might Spook the Market From Here

There are many bricks in the market’s latest wall of worry:

• A government shutdown is scheduled to begin on December 3.
• December 15 is the debt ceiling deadline.
• The Fed may accelerate its taper, completing it in March 2022 and raising rates three times next year.
• OPEC might hold off on increasing oil supply and push up prices to $100 or even $120 per barrel.
• Inflation could go even higher in 2022 than economists currently expect.
• Stock valuations are already at a 20-year high.

Any one of those could send the stock market skidding lower. But let’s focus on that last one first.

According to JPMorgan, the S&P 500 is 27% historically overvalued. Which means it hasn’t been this bad since the tech bubble.

As such, both Goldman Sachs and Moody's think we could be in for a lost decade for stocks.

Other analysts, admittedly, aren’t so pessimistic. They only expect a lost four years.

Fortunately for us, it’s always a market of stocks, not a stock market. So there are always fortunes to be found.

Before the Black Friday dip, the market was up 2% in November and the Nasdaq was up 3%. Yet look how many tech stocks were down 30%, 40%, or even 50%+!

(Source: Twitter)

For anyone waiting for an epic market crash on par with the Great Depression, it's already here. It’s just concentrated in overpriced tech.

Mr. Market is finally remembering that valuation matters. In the long term, it’s that kind of fundamental – along with yield and growth – that determines 80% of returns.

Technology Stocks Stand Alone When It Comes to Inflation

In this case, the fundamental truth behind big tech’s slide might be because of rising interest rates. Not to mention that we’re experiencing the highest inflation in 31 years.

That’s a bad combination, to say the least.

That’s why, in the 2000s, value stocks outperformed growth by 6% annually. And in the 1970s, they outperformed growth by 10% annually.

Consider real estate investment trusts (REITs). They performed the best those five decades ago, beating out the S&P 500 BY 13% annually.

I know people tend to think of them as bond alternatives. But that’s just not true, especially in the long-term.

(Source: Daily Shot)

Technology actually makes for the best bond comparison when it comes to interest rate sensitivity. The very same tech that tends to have the fastest growth rates.

And today, tech is more rate-sensitive than at any time in the last two decades. So that explains that.

The Fed and a Potential Policy "Mistake"

Wall Street likes to say "don't fight the Fed." And for 12 years, that's been true.

The central bank is expected to double down on scaling back its liquidity-boosting asset purchases – from $15 billion to $30 billion per month. That means the program would end in March.

Goldman economists also predict three rate hikes in 2022 and another two in 2023, with the first happening in June. The bond market seems to agree.

Yahoo Finance adds:

“‘The increased openness to accelerating the taper pace likely reflects both somewhat higher-than-expected inflation over the last two months and greater comfort among Fed officials that a faster pace would not shock financial markets,’ economists led by Jan Hatzius noted."

The Fed's goal is to increase rates to 2%-3% through a total of 8-12 rate hikes over several years.

Yet, once again, that shouldn’t worry anyone buying quality blue chips at reasonable or attractive prices. Only those buying, say, electric vehicle maker Rivian Automotive (RIVN) at 3,000x sales should be stressing out right about now.

So there’s that. Let’s move on to the next negative market mover now.

Political Risk: A Lot of Dumb Things Happen in D.C.

On Sunday, December 5, at midnight, the federal government will shut down unless a continuing resolution is passed.

(Source: Daily Shot)

The good news is that if the shutdown lasts for one week or less, the economic impact will be minimal. If it lasts for a full quarter, then GDP will take a 1% hit.

Believe it or not, the stock market doesn't care about shutdowns much. In fact, in the last decade, the market has always gone up during these events.

However, the debt ceiling is another issue.

Treasury Secretary Janet Yellen estimates that Congress has until December 15 to raise the debt ceiling. If it doesn’t, the government might default for the first time since 1979.

That was when a combination of congressional foolishness and word processing issues caused three weekly Treasury bill checks to be mailed out late.

The government ultimately defaulted on about $120 million as a result. The bond market reacted by raising short-term interest rates by 0.6%. And the whole thing cost U.S. taxpayers $12 billion in extra interest.

The market didn’t freak out that time, admittedly. But a prolonged default could trigger the worst financial crisis since the Great Recession.

Moody’s believes there are several ways the Federal government can avert the following worst-case scenario of:

• 8.5 million job losses in six months
• A 6.5% decline in GDP
• A 33% bear market in stocks
• 0.7% lower GDP in 2031
• 0.3% higher interest costs in 2031
• 1 million extra unemployed in 2031.

At last check, Minority Leader Mitch McConnell vows the GOP won't vote for a debt ceiling increase. It plans to use this as a political issue in the 2022 mid-terms.

Majority leader Chuck Schumer, meanwhile, vows the GOP will have to vote for an increase. He, naturally, doesn't want to give the GOP another political issue to run on in the 2022 mid-terms.

On top of that, it takes at least one week to pass an increase in the debt ceiling via reconciliation. Though that's only if the GOP doesn't propose dozens of amendments in the two "vote-a-ramas" the process requires.

In short, December 8 is the point of no return. After that, it will be impossible to pass the debt ceiling increase via reconciliation.

Now, there are still ways the administration can avoid a default from there. But they range from the strange yet legal… to the constitutionally questionable.

Again, we have found ourselves in similar pickles before. That’s why, in 2011, for instance, S&P downgraded the U.S. credit rating to AA+. So it’s not a sign of the apocalypse that Fitch has us at AAA with a negative outlook, which indicates a 33% expectation of a downgrade.

But a default could be a crisis on par with the Great Financial Crisis of 2009.

In which case, the market could sell off by 10%-20%.

Almost certainly, someone will step in somehow at some point, however. Here’s why…

Studies show that 80% of decisions in D.C. are made based on what the richest 20% of Americans want. And 89% of stocks are owned by the top 10% of Americans.

So if stocks fall 10%-20%, big donors will call their politicians and no doubt make something happen. Fairly fast too.

Oil Prices

The Biden administration recently orchestrated a coordinated release of strategic petroleum reserves – with a total potential of 66 million barrels over several months – between the U.S., U.K., India, and South Korea.

This was meant to drive down oil prices and therefore inflation. Yet on the day of the announcement, oil prices rose 3% thanks to OPEC+.

That group of countries controls over 50% of global supply. And 66 million barrels of oil (released over several months) equals 18 hours of global demand.

So they’re now considering not increasing their own supply by the 800,000 barrels per day January-February they’d planned to. As a result, Goldman expects oil could hit $100 soon, and Bank of America is predicting $120 in H1-22.

The good news is that, at some point, high oil prices will cause U.S. supply to increase. Ultimately the cure for high oil prices is... high oil prices.

But in the short term, it could trigger:

1. Even higher inflation
2. Long-term interest rates rising
3. Tech stocks falling
4. The S&P tanking.

Obviously, none of that is desirable.

Omicron: The Biggest Short-Term Risk to This Overvalued Market

But the biggest short-term risk by far is the Omicron Variant, which already has 50 mutations. That's double those of the Delta variant.

Pfizer (PFE), Moderna (MRNA), and AstraZeneca (AZN) expect to know by mid-month how effective their vaccines are against Omicron. And if necessary new mRNA vaccines can be ready within 100 days against any new variant.

(The FDA approval could take longer, of course.)

Fortunately, symptoms appear to be relatively mild, with no indication of higher mortality. But it’s probably pretty transmissible – as much as 500% more so than Delta.

So far, Omicron has been detected in Israel, Singapore, the U.K., Australia, Austria, Germany, Belgium, and the Netherlands. And it’s probably just a matter of time before the U.S. sees some too.

However, Omicron is not a doomsday virus likely to trigger a brand-new pandemic. And global healthcare systems are NOT likely to be overwhelmed.

Yes, European countries are considering another round of lockdowns. But economists are confident that the global economy in general is more resilient against such things after living through them off and on for two years.

In Conclusion…

Stocks will always experience periods of volatility.

But that shouldn’t scare you if you have a prudently risk-managed portfolio. If anything, you’ll see it as a buying opportunity for quality stocks trading at suddenly unloved prices.

We certainly do.

Risk management protects prudent long-term investors. It allows us to sleep well at night during any and all market freak-outs, both big and small.

Risk management is what allows you to remain calm and disciplined when Wall Street runs deep red.

And risk management allows you to be prepared for virtually any economic or market impact. When you focus on the only things that matter – safety, quality, yield, growth, value, and risk management – you’re prepared for any new brick placed in the Wall of Worry.

The wall always seems daunting, we know. But as long as America endures, the stock market will remain the highest-probability, lowest-risk way of building income and wealth over time.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.