A Return to Value

A Return to Value

We are currently going through the second market correction this year. The first one occurred in February. This second correction is deeper of course and scarier. Corrections are a healthy part of the market process and they occur largely to clean up the excesses of the previous upswing. The market at its core is no more than a complicated thought form and the energy within it, is made of all the various market participants. When the market goes up strongly people get bullish and feed off of each other’s energy (the fear of missing out on easy money). They will climb over each other in their desire to buy stocks. They will reach and put in a higher bid in their zest to buy and own shares. A premium is put on the future growth potential of companies as people get increasingly bullish about the prospects of the future. When this happens things can get sloppy and overdone on the upside and it reaches a point where everybody who could buy has already bought and a correction ensues to siphon off the excesses of the previous bull run. (see the blogposts about the Speculator's Edge for more insight into the nature of the marketplace.)

But as I mentioned earlier, this is the second correction this year. That is rare and I have a feeling the inner workings of the market are going through a pivotal change in their nature. The market is chameleon-like in its essence and as time goes by it changes and morphs into something it wasn’t before. We have gone through an incredible period since the 2008/2009 financial crisis. The powers that be had to pump an incredible amount of liquidity into the financial system to offset the damage inflicted by the financial crisis. Almost all of that money went into the stock market (especially the U.S. market). But the Fed has had to put themselves in so much debt in creating all this liquidity that they now find themselves forced to siphon it back out of the market.

Couple that fact with the rare occurrence of two market corrections in one year and I think a changing of the guard is occurring in the marketplace. Growth stocks will no longer be given a premium valuation for their earnings potential. As there is less money sloshing around in the system, investors will be more careful in committing their funds to investments. They are liable to become more value orientated. Value investing has under-performed Growth investing since 2008/2009. That is a market anomaly. The reverse is usually true.

Once this correction runs its course I believe investors will be looking out on a new world. One in which value will again regain the investing mantle it has given up to growth over the last decade. People will be more careful with their investment dollars because they will have less of them to invest….The way I see it anyway…