About inevitability of the bear market correction

The bull market, which began to form in the US stock market since 2009, officially became the longest in history (lasting 126 months). Yes, on the way to this great growth, there were problems such as the 2011 flash crash of braking in 2015-2016 and a large decrease in 2018. But all these difficulties were successfully overcome and prices stubbornly continued to climb up.

Investors and traders are accustomed to such a state and rising prices in the market have become familiar to them, one might say, a natural state. But nothing lasts forever. Each time, history proves that growth always replaces decline. And the belief that “this time everything will be different” is refuted each time by reality.

One of the reasons for the rampant growth of the US stock market was the country's economic growth. The result of growth, in particular, was a decrease in unemployment to 1969. It would seem that this is an occasion for optimism and continued purchases in the stock market. But the situation is actually quite ambiguous.

The departure of the unemployment rate below naturally suggests that the economy has practically lost reserves for further growth and, all the more, its acceleration (companies simply have nowhere to take labor to expand their activities).

But even more interesting is the fact that low unemployment has historically meant low returns on the US stock market. For example, Mark Hulbert showed that on average over the past 100 years, the minimum yield on the US stock market was recorded during periods when the unemployment rate fell below 4.4%. At the same time, maximum profitability was during periods when unemployment exceeded 7%.

Why did this happen? One of the explanations for low unemployment leads to increased price competition among employers for labor, which leads to higher wages, which in turn spins the inflationary spiral, which forces the Fed to act and raise rates. An increase in the rate is a signal and a reason for the overheated stock market to decline. High unemployment, on the contrary, stimulates the Fed to lower rates and causes the stock market to grow.

Thus, purely statistically current conditions are ideal for inhibiting US stock market growth. At the same time, given that in recent years it has shown strong growth, reaching average values for the current unemployment rate will be possible only with an even stronger decline in stock prices.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).