At last fall's Financial Advisor Symposium in Chicago, Sam Stovall of Standard & Poor's gave a keynote presentation in which he claimed what this stock market needs is "a good 10% correction." Three weeks ago, I heard him saying the exact thing on the radio.
As of March 14, the Standard & Poor's 500 Index and the Dow Jones Industrial Average are several percentage points higher since Stovall first called for a correction. That doesn't mean he was wrong six months ago or last month.
Yet it's just one more indication that economic cycles keep growing longer and longer and the financial markets reflect what is going on in the real business world. And most of the news that flows from this phenomenon is very positive, as Nick Murray says in his column this month more elegantly than I can here.
For example, the U.S. economy has experienced only two mild recessions in the last quarter of a decade. The current bull market in stocks is the second longest in history to continue without a proverbial 10% correction. And it means that inflation can remain low and employment growth can be steady for extended periods of time.
And for better or worse, it also implies that imbalances in the economy and the markets also can enjoy much longer half-lives than they once did. This means that while the South Sea bubble lasted less than a year the Internet bubble lasted five years. Our current account deficit is another example, although its duration pales next to that of The Netherlands, which has been running such a deficit for about 400 years and still enjoys one of the world's most prosperous economies.
So it goes with this latest crisis du jour, the subprime mortgage meltdown. The longer the housing bubble went on, the worse the quality of mortgage loans became.
Now the question is how severe will the damage be. Anti-American journalists in some U.K. newspapers had a jolly good time in March writing about the hedge-fund Masters Of The Universe taking their private jets and Lamborghinis off to our nation's trailer parks to conduct primary research on the extent of the problem. But the spillover may be minor.
Speaking at last year's Schwab Institutional Impact conference, former Fed Chairman Alan Greenspan noted that when real estate bubbles burst in both England and Australia a few years ago, the rest of their economies barely blinked. Greenspan, of course, is hardly an innocent bystander in the U.S. housing bubble, and it should be noted that his record as a forecaster was never all that great either.
So this observer won't be all that surprised if Greenspan's odds on a 2007 recession, one out of three, turns out to be high. As for Sam Stovall, one of these days, he'll get his 10% correction. As for the rest of us, we're quite lucky to live in these times.
P.S. If you haven't already registered for our third annual Financial Advisor Symposium in Las Vegas, there's still time to do so by visiting www.fa-mag.com. More than any past conference, this event is designed for advisors looking to upgrade their marketing efforts.