In the words of Joe Strummer and Mick Jones: “should I stay, or should I go?”
The market has provided plenty of mixed signals over the past three months and likely will continue to confuse and scare many investors in March.
No one knows for sure what the direction of the market will be, but we can increase the probability of success with technical analysis, the study of supply and demand, and reading recurring patterns of human behavior throughout history.
Let’s start with all the times the market corrected 10% or more in the time since the end of World War II. How did the market do in the months that followed? How long did it take for the market to recover? According to Goldman Sachs and CNBC Research, we have had 26 corrections since World War II that resulted in an average decline of 13.7%. The markets in all cases recovered within 4 months of bottoming out before climbing to higher highs.
The latest market correction is very similar to past declines. When the market started a correction in the month of January, in all cases, the market found its bottom in the month of March.
But what about the war in the Ukraine? Tom Lee of FundStrat crunched the numbers to demonstrate that markets reacted predictably during previous wars, such as the Vietnam War, the Gulf War, the Afghan War, the Iraq War, and the Crimea War. The markets bottomed at the time of the invasion, not as the war ramped up for months or years.
Have we demonstrated that the market will go higher with the facts presented? No, we have not. But investing is not about guarantees of market direction. It is always about buying quality companies at reasonable prices. The markets were trading at 21 times price to earnings (PE) prior to the correction, and we’re now seeing historically normal levels of 16.5 times price to earnings (PE). We think that markets are attractively priced due to price to earnings (PE) changes, the cost of money, and US GDP growth rates. Happy investing.
CIO of Alpha Dog ETF (RUFF)