Words are important. Not only because of what they say, but also what they imply without saying. The finance business is full of such words and phrases. Today, we’ll look at one of my (ahem) “favourites” – the word “correction”. Within the field of finance, a correction is when the stock market drops by 10% or more. A more precise term might be a drop of more than 10%, but less than 20%, because a drop exceeding 20% is no longer a correction, it is a bear market. Got that?
Here’s the thing about industry Bullshift. The presumed direction, when speaking about the future, is pretty much always up. Every prognostication from everyone who does a prognostication for every asset class under all circumstances is that ‘the market’ (whatever index or asset class is being discussed) will go up this year. I have literally never seen a major industry player predict a year over year drawdown in any asset class – ever.
As people must surely know, most financial predictions are made about the stock market. The data on the subject is quite clear – markets the world over go down about 3 times every 10 years. Many prognosticators hedge their predictions by allowing that, of course, a ‘healthy correction’ of about 10% could happen at any time and for almost any reason, including no discernable reason whatsoever.
My question to you is about symmetry and consistency. If a drop of 10% or more is a “correction”, it must logically follow that a gain of 10% or more is an “incorrection”. Who decides what is correct or incorrect, anyway? Let’s extend the thinking. If a gain of 10% or more is an incorrection, then what do we call a gain of 20% or 30% or, as is now the case in Canada and the United States – 50%? I propose we call it an ‘Incorrection of Epic Proportions’. My view is that markets are now massively incorrect in how they are pricing risk assets. Of course, an industry that is committed to Bullshift would never be so consistent in its nomenclature.