Lessons from the summer sell-off

It’s no easier to predict the market’s recovery than its decline.

John Rekenthaler 31 August, 2015 | 5:00PM

Just as few foresaw the long bull market, few anticipated the recent downturn. Sure, there are people who have predicted 17 of the last three sell-offs, and who will claim to have called this one, too. Nope. Huddling in a tent for several years straight, then leaping up to exclaim "Aha!" when the thunder finally sounds, does not a rain doctor make.

Besides, the skeptics got the causes wrong. The stock market was supposed to tumble because of the Federal Reserve's loose policies (quantitative easing!), which would spark inflation and sink the U.S. dollar. But inflation has remained low, oil prices have plunged, and the dollar is strong. In addition, Treasuries have rallied, whereas per the bears' inflationary thesis they should have fallen. This downturn has not followed the bears' script.

In short, the shorts were caught short. As of course were the longs, as the inability to know the unknowable is an equal-opportunity affliction.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.

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