With the sharp drop in US equities investors have experienced, and the questions I have been getting about the drop, I thought I would update a piece I wrote back in 2008 explaining why bear markets are a necessary evil.
I believe recessions were consistent with ten of the last 14 bear markets. As you are aware, bull markets don't tend to end due to age but overvaluation that we have seen the past few years. Without a recession (that few desire) stocks will likely to return to prior levels. As a result, recessions tend to be necessary to clear markets of excess. Trump's actions are likely to accelerate our current economic slowdown. However, the impact of his capitulations are difficult to estimate.
Of course they must agree because without bear markets the risk of equity investing would be lower. If the risk is lower, the discount rate applied to future expected earnings will go down, driving prices up and future returns down. If there was no risk of negative market there would likely be no equity risk premium and no one would like that.
Schumpeter did coin that phrase but meant it relative to industries, like autos replace horse and buggy. Now AI replacing attorneys in reviewing documents.
But recessions are not necessary, but sometimes needed when there are excesses like inflation.
I believe recessions were consistent with ten of the last 14 bear markets. As you are aware, bull markets don't tend to end due to age but overvaluation that we have seen the past few years. Without a recession (that few desire) stocks will likely to return to prior levels. As a result, recessions tend to be necessary to clear markets of excess. Trump's actions are likely to accelerate our current economic slowdown. However, the impact of his capitulations are difficult to estimate.
I'm not sure the wall street perennial bulls agree.
Of course they must agree because without bear markets the risk of equity investing would be lower. If the risk is lower, the discount rate applied to future expected earnings will go down, driving prices up and future returns down. If there was no risk of negative market there would likely be no equity risk premium and no one would like that.
I do not disagree. Recessions are necessary as well to remove the excesses as well.
Wasn't it Joseph Schumpeter who coined the term "creative destruction?"
Schumpeter did coin that phrase but meant it relative to industries, like autos replace horse and buggy. Now AI replacing attorneys in reviewing documents.
But recessions are not necessary, but sometimes needed when there are excesses like inflation.