The Market Can't Keep Going Down

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Michael Caronna / Reuters

One of the most frequent comments made by market experts and investors now that the indexes are reaching multi-decade lows is that the market can't keep going down forever. It allows investors to feel something beyond the overwhelming pessimism that greets them every day when the bell rings at 9.30 and the trading starts.

Of course, a mathematician can show anyone who has a minute's time that the markets can go down for a nearly infinite number of days if the decreases get smaller and smaller. For investors who want to get a small fraction of their investments back sometime in the next decade this sort of academic argument may be didactic, but it has no practical use. What is likely to happen to the market is that it will fall another 15% or 20% and then trade sideways, perhaps for several years. That is what happened from 1965 to 1981.There were peaks and troughs during that stretch and clearly traders made money on those. But, it was a particularly poor period for long-term investors who wanted to buy and hold. (See pictures of the top ten scared traders.)

In many ways, a market that keeps going down is a good market. If it has momentum in one direction, it may transfer that energy to a leg up. That happened in the late 1930s going into the 1940s and happened again at the beginning of the current decade.

This wish to see the market stop its drop is in many ways misplaced. Investors still have an excessive desire to see the market change direction while it is still too early. Getting money back into the market will require that a perception of value has returned in the form of lower prices in relationship to earnings and assets. That seems a long way off. And, it is, but the length of this stagnation depends on the violence and rapidity of the correction. The market is going down, probably much further. It can get there at a trot or a gallop. The process, in either case, will be remarkably painful. One just dispenses the punishment in slow motion.

The market can drop forever or at least it may seem that way. There is no point in sustaining the illusion that the market has to rise the way it did over the last several years. The economy may remain moribund and leave no reason for equities to rise.

The last few years have held out the promise that the market would go up year after year. This was never an assurance which could be kept. The people who made it took their cash out two years ago and live in an island off the south of France.

Douglas A. McIntyre

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