This Stock Market Correction Is Triggered By These Reasons

Market corrections are scary. And who knows if this market correction will turn into a market crash with all the uncertainties in the global economies … Brexit, trade tensions, global growth slowdown, etc.

A Quick Overview on Global Economies

The European countries’ economies look like it could be falling apart with the unemployment rates in France, Italy, and Spain sitting at about 9%, 15%, and 10%, respectively.

Gross domestic product (“GDP”) is a monetary measure of the market value of all the final goods and services produced in a period of time.

Here’s a comparison of the 2017 GDP of the 3 countries:

2017 GDP of Spain, Italy, and France in a line graph

Germany and the U.K. are doing OK with recent unemployment rates of +3% and +4%.

2017 GDP of France, the U.K., and Germany in a line graph

Note that the combined 2017 GDPs of Germany, the U.K., France, Italy, and Spain was about 10.8 trillion, which was about 56% of the U.S.’s GDP. Still, if Europe’s economy falters, there’s going to be a ripple effect.

China’s 2017 GDP was 12.24 trillion, which was about 63% of U.S.’s GDP. China’s unemployment rate is about 4%.

The U.S. and Canada’s unemployment rates are about 3.8% and 5.6%, respectively. So, they’re

The U.S. and Canadian unemployment rates are at their decade’s low — at pre-recession levels. However, we have a Chinese idiom, 盛极必衰 (read as “shèng jí bì shuāi”), which means when it becomes most prosperous, it’s going to get worse from there (like flowers in bloom … and then they will wilt). One way or another, these low unemployment rates won’t last.

Graph of U.S. unemployment rate fram 2008-2018

Source: Trading Economics – U.S. Unemployment Rate

Graph of Canada's unemployment rate from 2008-2018

Source: Trading Economics – Canada Unemployment Rate

I’m not saying we’re going to experience a recession or market crash right now. However, we know it will come. And when it does, eventually, down the road, it will 否极泰来 (“pǐ jí tài lái”), which means when things can’t get any worse, it gets better, and it’s the opposite of 盛极必衰.

Using Royal Bank of Canada (TSX:RY)(NYSE:RY) as an example in the last recession, fiscal 2007 was when it reached a peak of prosperity (盛极必衰). Then the financial crisis hit and triggered a recession. Royal Bank’s earnings fell for 2 fiscal years, but eventually, there was an inflection point (否极泰来).

Royal Bank fundamental analysis graph

Source: FAST Graphs with author annotation

In summary, it took about 4 years for Royal Bank (and the other Big 3 banks in Canada) to recover their diluted GAAP earnings per share back to pre-recession levels, including 2 years of earnings decline and then about 2 years of recovery after that.

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Disclosure: At the time of writing, the author didn’t own any stocks mentioned.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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