The Market Will Probably See a Correction, but Don't Bet on When

By Motley Fool Staff Markets Fool.com

According to more than a few financial news sources and research notes, a correction in the market is likely going to happen in the next 10 to 20 years.

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In this clip fromIndustry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmannexplain why the experts are saying the market will correct, and how likely they are to be right; why it's so hard to predict what the market will do in the short term; how often even professionals get this kind of thing wrong; and why it's so hard to time the market.

A full transcript follows the video.

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This video was recorded on April 21, 2017.

Dylan Lewis:I will lay out theargument for why there's probably a correction coming at some pointin the next decade to 20 years, andwhat the financial media narrative has been. Forpeople that aren't familiar, basically, the gist of it is,because of quantitative easing, which is basically the Fed gettingmoney into the economy,making borrowing very cheap,interest rates have been historically low. They've beenhistorically low for a very long amount of time. Because of those low yields,investors have been pushedinto equitiesbecause they're looking for better returns. That demand drives up stocksinto overvalued territory. That's what we see, that's the gist of all of these research notesthat are saying the market is overvalued. Really,that line of thinking totally makes sense to me. My collegeeconomics coming back, I totally see the dots connecting there. And Hunter brings up great points with the data here. Typically, theS&P 500 on a trailing basis, P/E somewhere between 10 and 20.

The problem, though, is thateven if you're right withwhat your thesis is, when it comes to market timing and deciding, "I'mgoing to wait three months to do anything," or, "I'm going to sell now because it seems like we're at peaks," isyou have to be right not only about the thesis, butyou have to be right but the timing and when you act on it, and it's really tough to nail both of those things.

David Kretzmann:It's really tough. There are someinteresting dynamics at play,and it's incredibly difficult to predictwhere the market is going in the short term. You have a lot of experts from theInternational Monetary Fund, the IMF, andhigh-ranking economists who were predicting before Brexit and the U.S. election that ifBritain leaves the EU, andif Donald Trump is elected president,there's a very high likelihood that the market will crash. Andlo and behold, the market is hitting new highs as a result. It'salso interesting to look at whatWarren Buffett has been doing. We traditionally see Buffett as more in that value mode as aninvestor. Between the U.S. election of Trump andearly February, he was a net buyer of stocks. He bought over $20 billion of stocks, includingApple, which has been anincredible performer, and driving a good chunk of the returns of the S&P 500 this year. If a correction was coming, if a crash was coming, Buffett would be the last personI would expect to be buying stocks,because he tends to be a more conservative investor.

To your point, Dylan,I think it's a great point,looking at interest rates. Interest rates are at historic lows. Wehaven't really navigated throughprolonged periods of such low interest rates. Whenlooking at investments, you have to look at the alternatives. If you're not going to invest in stocks right now, where are you going to invest? The U.S. Treasuries or bonds are yielding 2% to 3%, 10-Year Treasuries, which is very low. So,that's not very attractive. You could put it in your savings account, maybe 1%, if you're lucky, or less. So,you have to look at the alternatives. So,it's understandable to see why people arelooking at the scope of investment possibilities right now. And they're gravitating toward stocks, even though, yeah, they look, on average, pricier than theytypically have been. But compared to everything else, it still looks more attractive.

Lewis:Yeah. Bringing it backaround to some historical examples, Hunter's questionreminded me of news that was swirling in early 2016.I'm sure you remember this.There were several big banks,RBSwas one,I thinkMorgan Stanleywas another, they put outresearch notes in January, and they were basically urging their clients to sell stocks. They were saying, "We see thesecataclysmic issues coming to the market." It was,again, largely due toquantitative easing stuff with the Fed, lowinterest rate environments, and what that does to equities over an extended period of time, or else some growth concerns with China at the time. And you look at the run that the market has gone on since January 2016, I think it's up about 20%.

David Kretzmann has no position in any stocks mentioned. Dylan Lewis owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has a disclosure policy.