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What will trigger the next 25%+ drop?


Sunrider
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Given valuations and the extended run, what will trigger a correction?  

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  1. 1. Given valuations and the extended run, what will trigger a correction?

    • Disappointment with tax reform not happening in 2017?
    • Trouble in the Chinese Economy?
    • Progress on Brexit negotiations indicating no transitional arrangement + contagion?
    • Other?
    • Terror attack?
    • Korea?
    • Trumpist failure (other than taxes)?


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Hi All

 

In light of the stimulating debate over in the other thread, where it appears that most agree that valuations are high (although not necessarily in a bubble), it strikes me that perhaps the more pertinent question is what will trigger the next correction?

 

(Note: Whether that trigger then leads to a feedback loop with passives having to sell out, money leaving markets, more forced selling by ETFs due to withdrawals, etc. is a separate question. Same with the potential pressure from low-vol funds having to sell.)

 

Thank you.

 

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Hey all:

 

Hard to say what causes/triggers a 25% drop...

 

Could be one too many interest rate increases.

 

Could be a student loan implosion.

 

Could be politically related.  Perhaps problems with President Trump?  A resignation or impeachment?  Coup detat?  Civil war in the USA?  Other, unforeseen political problems in USA?  Congress is not exactly effective NOR do they enjoy confidence from the average American citizen.

 

External problems?  North Korea, Russia, China?  A major terrorist attack?  A major hacking problem with internet/infrastructure?

 

Trade issues?  Problems with NAFTA?  Problems with China? 

 

Surely there will be a major drop...only question is when.

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No idea but if I had to guess: IT related problem or attack. Amazing how we keep it all afloat, especially at old financials where hardly anyone knows how systems work and how they are connected. Patching the patches of the patches... A complex world creates complex problems.

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I don't think we get a sharp 25% drop.  The S&P has been acting differently than the rest of the world for a while.  My belief is that the inflows to Vanguard are pushing everything up together which is why we get everything correlated.  At some point this has to stop no? Is this a 5%, 10% correction?

 

My bigger concerns are that at some point the boomers withdrawls are going be a net ouflow of funds to fund their retirement both individually and their pensions.  I've done some reading on that for 5-7 years now and the expected date keeps getting pushed out due to boomers working longer and higher returns are helping.  When that happens it should be the opposite of the rising tide.  Vanguard or whatever will just sell to fund withdrawls and the water will go out.  Once the flow goes out I think then you will see some weird dislocations as people run from this passive strategy to whatever.  I've been 100% invested my entire life and when I see funds turn negative for a few months I will go to 50% cash as a defensive move.  I wouldn't be surprised to see a lost decade.

 

That said, I am an idiot.  I have been buying small cap value for the past several years so I would have been better off just giving my money to Vanguard.

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I'd probably say the odds are greater that all of these things, and probably others that emerge, will collectively cause a 25% erosion over a moderate period of time. I think today's market is more-so a byproduct of a lot of conditions and none individually IMO are going to change so drastically that we have a huge and sudden rug pulled out from under us. What's more likely is they have a gradual and adverse impact on global economies and on many companies and as such we get some sort of EPS related correction over the course of a few quarters.

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A 25% drop in short order will have to be from some sort of shock. Perhaps a housing crisis 2.0. As rates rise, people will start to get stuck in their houses and prices will edge down. Those who purchased on ARMs and or bought with a small down payment could default. Longer term, I think we are in for stagnation. The "Better Deal" campaign on the left has legs as evidenced by Sanders popularity. Breaking monopolies, controlling medical costs, and forcing corporate profits to go to workers as opposed to shareholders will lend to the stagnation or PE compression as growth prospects are curtailed. 

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Trump keeps taking credit for the market being up, so he'll have to own it when things go the other way.... ;D

 

The question wasn't who should take credit for it in the mind of the public, it was what will actually cause the next 25% drop. Presidents take credit for and get blamed for things they have nothing to do with all the time, that isn't really an interesting discussion.

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