Only Reason For Stock Market Correction

Plenty of reasons for the recent stock market correction may be found in mainstream media and financial blogosphere. But the true reason is only one.

The S&P 500 has fallen nearly 10% from the all-time high closing price on September 20, 2018, as shown in the chart below:

Several reasons for the stock stock market correction have been framed, among which these are the most prominent:

  • Overvalued tech stocks
  • Rising bond yields
  • Trade war
  • End of Trump economy
  • Rising debt

Some of the reasons are motivated by politics, others by lack of understanding of markets. However, in markets it is difficult or even impossible to establish causal relationships. Markets are complex, highly non-linear stochastic systems. Anyone, at any time, who thinks they know reasons, about anything regarding markets, is probably naive.

Many try to rationalize reasons for price action post hoc. This is a hopeless endeavor plagued by confirmation bias among numerous other cognitive biases. Others, in search of fame, try to predict market direction and constantly fail. We have seen famous “gurus” of the financial media failing in the last 9 years, some expecting hyperinflation due to QE as early as in 2011, others looking a return to 2009 lows in 2012. Then, all those naive technical analysts predicting another bear market in 2011 and 2016, and recently a new bull market rally near the September highs of this year.

As long as the US economy is producing new wealth driven by innovation and the US dollar is reserve currency, US stock markets will rise in longer-term, shrugging off any corrections, bear markets and certainty. The Dow Jones chart since 1915 is illuminating:

Despite depressions, recessions, bear markets, crashes, wars, terrorist attacks, the Dow index through proper rebalancing to reflect evolution of markets and technology has been making new highs and patient investors who know how to manage risk and uncertainty have benefited. Those who look for reasons for corrections usually fail to take advantage of rising stock markets. Looking for reasons constantly may reflect psychosis and inability to deal with uncertainty, which is a prerequisite for success in markets.

The only true reason markets have corrections is because corrections are a normal part of markets. Market cannot rise on a straight line due to complexity induced by reflexivity. All other reasons that are usually framed about market corrections are often wrong and usually motivated by ideology, politics or lack of understanding of the nature of these financial systems and their inherent complexity.


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