Sometimes the herd gets spooked, but sooner or later things settle down. Sometimes there’s real cause for concern and other times it is mostly rumor blown out of proportion. But whether it’s a world war or a banking crisis, it usually gets resolved in less than 5 years. Then everybody gets back to business building the earnings of companies that drive markets higher.

In last quarter’s note, I referred to my blog post from September 26, Recession Strategy,

“The real issue is not how deep the correction will be. The real concern is the duration of the decline. How long will it take to get back to even? The problem is not that the stock market will go down. The real problem is if you need to sell stock when valuations are low to fund current living expenses. That converts a temporary loss of capital into a permanent loss of capital.”

The good news is, we’re not in recession although growth is slowing. Much of the problem is tariff/trade driven and compounded by China’s slowing growth. Case in point, Apple, recently the most valuable company in the world, is down about 9% today (1/2/2019) because of Apple’s 7% growth and Tim Cook’s comments about business in China.

I often refer to a Morningstar Market Valuation Analysis that tracks a ratio that represents the average of market to fair value (premium or discount) for the more than 2000 companies they cover. That’s a powerful statistic that includes a tremendous amount of rational, systematic analysis. It is instructive to see what the chart looks like for the last 90 days (as of 1/2/2019).

According to the ratio, the market has gone from about 4% overvalued to a 12% discount. That’s a swing of 16% in terms of market price to fair value, and potentially more in absolute terms if analysts have reduced fair value estimates because of weaker economic data. Despite that, these types of corrections are more common than you might think if you focus on the last 10 years. A 10% decline represents a “correction” and a 20% decline counts as a “bear market”. Whatever you call it today, it doesn’t feel good, but it will pass. The main question is how long will it last?