Why are market corrections "healthy"?

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Guy42
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Why are market corrections "healthy"?

Post by Guy42 » Thu Dec 06, 2018 4:37 pm

Over the past couple of weeks, listening to TV finance broadcasts while on the treadmill at the gym, several analysts have said that the market is "due for a correction" and that a market correction is "healthy".
I'd appreciate if someone would explain why market corrections are "healthy".
Thank you.

magicrat
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Re: Why are market corrections "healthy"?

Post by magicrat » Thu Dec 06, 2018 4:41 pm

Guy42 wrote:
Thu Dec 06, 2018 4:37 pm
Over the past couple of weeks, listening to TV finance broadcasts while on the treadmill at the gym, several analysts have said that the market is "due for a correction" and that a market correction is "healthy".
I'd appreciate if someone would explain why market corrections are "healthy".
Thank you.
This is just nonsense talk. I would imagine that the TV talking heads are spewing whatever comes to mind to keep people tuned in so they can sell advertising.

Theoretical
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Re: Why are market corrections "healthy"?

Post by Theoretical » Thu Dec 06, 2018 5:05 pm

It boils down to the fact that negative/downside volatility is ultimately healthy for a robust system, and especially to keep the market from getting hyper-overleveraged. I'm very Taleb-ian on these sorts of things, but if you don't take risk, high returns are suspect and you might just be a sucker.

The main problem with Quantitative Easing being stretched out for so long is that it meant that dollars/yen/euros/pounds had to find investments, whether they were sound or not. In addition, the smooth ride led to a lot of people being on the wrong end of the VIX trade because it's always going to be smooth.

TheHouse7
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Re: Why are market corrections "healthy"?

Post by TheHouse7 » Thu Dec 06, 2018 5:06 pm

magicrat wrote:
Thu Dec 06, 2018 4:41 pm
Guy42 wrote:
Thu Dec 06, 2018 4:37 pm
Over the past couple of weeks, listening to TV finance broadcasts while on the treadmill at the gym, several analysts have said that the market is "due for a correction" and that a market correction is "healthy".
I'd appreciate if someone would explain why market corrections are "healthy".
Thank you.
This is just nonsense talk. I would imagine that the TV talking heads are spewing whatever comes to mind to keep people tuned in so they can sell advertising.
+1
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

scout1
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Re: Why are market corrections "healthy"?

Post by scout1 » Thu Dec 06, 2018 5:14 pm

1) Modest declines help people reassess their risk tolerance which is a good thing to do before a big decline. We see on Bogleheads a few threads from individuals reconsidering their stock exposure and comfort levels now that volatility has increased. Owning stocks is risky and without volatility people may not be assessing their risk properly.

2) I agree it's nonsense

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JoMoney
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Re: Why are market corrections "healthy"?

Post by JoMoney » Thu Dec 06, 2018 5:19 pm

Sometimes the market piles up too much of it's own crap. It's like having a regular BM, healthy.
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rmelvey
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Re: Why are market corrections "healthy"?

Post by rmelvey » Thu Dec 06, 2018 5:24 pm

Lots of people invest/trade using borrowed money. If the market goes up with no corrections for a long period, more and more people feel comfortable investing with more leverage. This is bad for the long term, because too much leverage can create a fragile financial system. Corrections such as this one flush out the highly levered investors early, and cause others to be more prudent with their use of leverage.
Last edited by rmelvey on Thu Dec 06, 2018 5:25 pm, edited 1 time in total.

jacksonm
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Re: Why are market corrections "healthy"?

Post by jacksonm » Thu Dec 06, 2018 5:25 pm

If you are in a 401k plan and the market "corrects" it should mean that you were paying too much for your stock purchases. This would be a good thing in the long run.
Last edited by jacksonm on Thu Dec 06, 2018 5:55 pm, edited 1 time in total.

alex_686
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Re: Why are market corrections "healthy"?

Post by alex_686 » Thu Dec 06, 2018 5:25 pm

magicrat wrote:
Thu Dec 06, 2018 4:41 pm
This is just nonsense talk. I would imagine that the TV talking heads are spewing whatever comes to mind to keep people tuned in so they can sell advertising.
I will modestly take the other side. There is a reasonable amount of economic theory that easy money and low volatility invites speculators, and then prices are driven by the "beauty pageant" forces (what does I think other people will pay for this) rather than fundamental economic forces. Downturns flush out these speculative investors leaving it to the real investors.

I think this is true. The problem is that it is not an actionable theory - or at least from the individual investor standpoint.

delamer
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Re: Why are market corrections "healthy"?

Post by delamer » Thu Dec 06, 2018 6:06 pm

I don’t see them as healthy, so much as inevitable.

They are just part of the price you pay for taking risk.

averagedude
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Re: Why are market corrections "healthy"?

Post by averagedude » Thu Dec 06, 2018 6:45 pm

Market gains now rob future returns later.

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bertilak
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Re: Why are market corrections "healthy"?

Post by bertilak » Thu Dec 06, 2018 7:13 pm

"Corrections" are good for those who still have, or will have, substantially more money to invest. This assumes that "correction" means a follow-on recovery in some reasonable amount of time. This is usually a reasonable assumption.

For retirees who are under-represented in income producing investments a correction is a bad thing. Think in terms of being in a "house of correction!"
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

MJW
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Re: Why are market corrections "healthy"?

Post by MJW » Thu Dec 06, 2018 8:38 pm

JoMoney wrote:
Thu Dec 06, 2018 5:19 pm
Sometimes the market piles up too much of it's own crap. It's like having a regular BM, healthy.
I heard the market recently was seen with a bag of Chipotle.

chevca
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Re: Why are market corrections "healthy"?

Post by chevca » Thu Dec 06, 2018 8:43 pm

"Healthy" would be just continually going up, right?

The market has never been healthy that way. It goes up, it goes down, and hopefully over the long run it goes up more than down.

Agree that it's nonsense and noise. Watch something else while on the treadmill, OP. :happy

aristotelian
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Re: Why are market corrections "healthy"?

Post by aristotelian » Thu Dec 06, 2018 9:22 pm

A charitable way of saying it is that stocks are inherently volatile and corrections are to be expected, even in a healthy economy.

Also, arguably it would be preferable to have a couple of smaller corrections than a massive bubble and crash, even if the resulting valuation ends up the same.

Teague
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Re: Why are market corrections "healthy"?

Post by Teague » Thu Dec 06, 2018 9:33 pm

The "healthy correction" bit is self-therapy for those who are actually quite troubled by the drop. It's like saying "what doesn't kill you only makes you stronger." Which is nonsense, too.
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Taylor Larimore
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Re: Why are market corrections "healthy"?

Post by Taylor Larimore » Thu Dec 06, 2018 9:48 pm

Guy42 wrote:
Thu Dec 06, 2018 4:37 pm
Over the past couple of weeks, listening to TV finance broadcasts while on the treadmill at the gym, several analysts have said that the market is "due for a correction" and that a market correction is "healthy".
I'd appreciate if someone would explain why market corrections are "healthy".
Thank you.
Guy42:

Every day TV finance broadcasters must come-up with something to get the attention of viewers. "The market is due for a correction" is one of those meaningless topics.

Stay the course.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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willthrill81
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Re: Why are market corrections "healthy"?

Post by willthrill81 » Thu Dec 06, 2018 10:03 pm

alex_686 wrote:
Thu Dec 06, 2018 5:25 pm
magicrat wrote:
Thu Dec 06, 2018 4:41 pm
This is just nonsense talk. I would imagine that the TV talking heads are spewing whatever comes to mind to keep people tuned in so they can sell advertising.
I will modestly take the other side. There is a reasonable amount of economic theory that easy money and low volatility invites speculators, and then prices are driven by the "beauty pageant" forces (what does I think other people will pay for this) rather than fundamental economic forces. Downturns flush out these speculative investors leaving it to the real investors.
Correct. The occasional 10% correction helps to reduce the number of 50% bear markets. And even if the long-term returns are the same in both instances, the former certainly 'feels' a lot better.

We really don't want many speculators in the stock market. You'd like it in the short-term because they would drive prices up, but in the long-term, the piper will still be paid, and returns would suffer.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

pdavi21
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Re: Why are market corrections "healthy"?

Post by pdavi21 » Thu Dec 06, 2018 10:11 pm

Because the trash companies go in the trash can.

hdas
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Re: Why are market corrections "healthy"?

Post by hdas » Thu Dec 06, 2018 10:14 pm

willthrill81 wrote:
Thu Dec 06, 2018 10:03 pm
The occasional 10% correction helps to reduce the number of 50% bear markets.
This assertion might sound insightful and intuitive but it has nothing to do with reality.
Stay the course and buy some more.

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willthrill81
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Re: Why are market corrections "healthy"?

Post by willthrill81 » Thu Dec 06, 2018 10:18 pm

hdas wrote:
Thu Dec 06, 2018 10:14 pm
willthrill81 wrote:
Thu Dec 06, 2018 10:03 pm
The occasional 10% correction helps to reduce the number of 50% bear markets.
This assertion might sound insightful and intuitive but it has nothing to do with reality.
Care to explain why? Because I can show why I believe it's true.

The long-term value of stocks and the stock market as a whole revolves around earnings. The prices people are willing to pay to buy future earnings do not directly impact the earnings themselves (not much anyway). So if prices are getting too high with respect to future earnings, a correction of some type will occur unless earnings can 'catch up' with the higher prices. But if the correction doesn't occur and prices continue to go higher and higher in relation to future earnings, a bubble forms. It's when bubbles 'pop' that we see major bear markets. But if the bubble never forms at all or is gently deflated by the occasional correction, the number of 'pops' is reduced.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

travelogue
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Re: Why are market corrections "healthy"?

Post by travelogue » Thu Dec 06, 2018 10:50 pm

The way Tim Geithner expressed this idea in a Yale course on the Financial Crisis (available online) was by analogizing to flood control and building in risky areas. The better modest floods were controlled, the more people build up on flood plains when decade after decade no flooding occurs. Then, when a really big flood arrives and overwhelms the flood control measures, so much risky development has built up in the flood plane that the result is far more devastating than if modest floods would have occurred (inflicting modest damage and making risk tangible) on a more regular basis.

I suppose another analogy would be wild-land fire suppression that allows the build up of massive tinder that eventually erupts into conflagration rather than allowing modest fires to clear out the underbrush (causing recoverable amounts of damage while reducing the build up of massive amounts of risk) on a regular basis.

So, if you buy the logic in these analogies, market corrections are healthy in that they discourage the build up of excess risk across several dimensions (asset overinflation, risk-taking behavior, leverage, interconnected bets with the possibility of contagion).

Remember the short vol trade that worked wonderfully during the artificially placid 2017 market until it completely blew up this February?

It seems very in line with many of the ancient Greek myths that the very things we do to try and keep us safe end up sowing the seeds of our undoing.

user5027
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Re: Why are market corrections "healthy"?

Post by user5027 » Fri Dec 07, 2018 9:03 am

Think of it as being on a bland diet to avoid irrational exuberance. :D

hdas
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Re: Why are market corrections "healthy"?

Post by hdas » Fri Dec 07, 2018 9:27 am

willthrill81 wrote:
Thu Dec 06, 2018 10:18 pm
hdas wrote:
Thu Dec 06, 2018 10:14 pm
willthrill81 wrote:
Thu Dec 06, 2018 10:03 pm
The occasional 10% correction helps to reduce the number of 50% bear markets.
This assertion might sound insightful and intuitive but it has nothing to do with reality.
Care to explain why? Because I can show why I believe it's true.

The long-term value of stocks and the stock market as a whole revolves around earnings. The prices people are willing to pay to buy future earnings do not directly impact the earnings themselves (not much anyway). So if prices are getting too high with respect to future earnings, a correction of some type will occur unless earnings can 'catch up' with the higher prices. But if the correction doesn't occur and prices continue to go higher and higher in relation to future earnings, a bubble forms. It's when bubbles 'pop' that we see major bear markets. But if the bubble never forms at all or is gently deflated by the occasional correction, the number of 'pops' is reduced.
As I said, the idea appears to be sound, except that when you try to put numbers on the table, and express it in a way that you can test a hypothesis in the data, you'll see that there's nothing there. Why do you think Sornette is still teaching?. Cheers :greedy
Stay the course and buy some more.

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willthrill81
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Re: Why are market corrections "healthy"?

Post by willthrill81 » Fri Dec 07, 2018 9:30 am

hdas wrote:
Fri Dec 07, 2018 9:27 am
willthrill81 wrote:
Thu Dec 06, 2018 10:18 pm
hdas wrote:
Thu Dec 06, 2018 10:14 pm
willthrill81 wrote:
Thu Dec 06, 2018 10:03 pm
The occasional 10% correction helps to reduce the number of 50% bear markets.
This assertion might sound insightful and intuitive but it has nothing to do with reality.
Care to explain why? Because I can show why I believe it's true.

The long-term value of stocks and the stock market as a whole revolves around earnings. The prices people are willing to pay to buy future earnings do not directly impact the earnings themselves (not much anyway). So if prices are getting too high with respect to future earnings, a correction of some type will occur unless earnings can 'catch up' with the higher prices. But if the correction doesn't occur and prices continue to go higher and higher in relation to future earnings, a bubble forms. It's when bubbles 'pop' that we see major bear markets. But if the bubble never forms at all or is gently deflated by the occasional correction, the number of 'pops' is reduced.
As I said, the idea appears to be sound, except that when you try to put numbers on the table, and express it in a way that you can test a hypothesis in the data, you'll see that there's nothing there. Why do you think Sornette is still teaching?. Cheers :greedy
Please provide some theory and/or empirical evidence as to this. Naked assertions aren't going to change anyone's mind.

You're basically arguing that prices don't lead to or impact financial bubbles.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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tennisplyr
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Re: Why are market corrections "healthy"?

Post by tennisplyr » Fri Dec 07, 2018 11:46 am

It's healthy in the sense that it shows the investor that the market doesn't always go up.
Sadly these TV guys just love to talkl
Those who move forward with a happy spirit will find that things always work out.

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Taj_Mahalo
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Re: Why are market corrections "healthy"?

Post by Taj_Mahalo » Fri Dec 07, 2018 3:33 pm

MJW wrote:
Thu Dec 06, 2018 8:38 pm
I heard the market recently was seen with a bag of Chipotle.
LOL...with a healthy serving of romaine lettuce!
Income is not wealth. Wealth is not income. Both are equally as important and either is capable of producing the other.

Quickfoot
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Re: Why are market corrections "healthy"?

Post by Quickfoot » Fri Dec 07, 2018 3:38 pm

magicrat wrote:
Thu Dec 06, 2018 4:41 pm
This is just nonsense talk. I would imagine that the TV talking heads are spewing whatever comes to mind to keep people tuned in so they can sell advertising.
It actually isn't nonsense, it is true. Corrections aren't just good, they are necessary and not just to help avoid over-valuation or speculative "investing." Think of a correction / recession as causing companies to evolve, natural selection results in the surviving companies being much stronger. When market corrections and recessions happen it forces good companies to become leaner, innovate, and more productive and the bad ones go out of business or are acquired by stronger companies. When the correction / recession ends the surviving companies are much stronger and better able to compete and execute and this leads to better earnings which yields higher returns and stock prices and a more stable economy / market.

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