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Conditions for a Correction

Conditions for a Correction?

By

Derek Carawan, AAMS

One of the most important principles of investing is the length of time in the market, not timing the market. Consequently, the longer the period of time that you have until you need to access the money, the better. That doesn’t necessarily stop one from thinking about when the next market pullback will occur. A little bit of historical perspective might help.

According to Mitch Zacks, there has been a market correction (a drop of at least 10%) every year since 1900 on average. Regardless, people seem to forget all about that when we are living through a market drop in the present tense. Peter Lynch, the famous investment guy from Fidelity once said that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves”.

Just since 2008 the following events have had an effect on the markets:

  • Federal Reserve orchestrates takeover of Bear Stearns by JP Morgan
  • Lehman Brothers files for bankruptcy protection
  • Dubai credit crisis shakes markets
  • S. Debt crisis
  • Greek debt reduced to below investment grade
  • S&P downgrades U.S. debt rating to AA+
  • Eurozone approves second Greek bailout
  • Korea confirms successful testing of a nuclear device
  • Detroit, Michigan files for bankruptcy
  • Russia moves troops into Crimea
  • Argentina defaults on its debts
  • Chinese stock market crashes
  • Brexit

Each of these were negative events as far as the stock market is concerned. Yet, the market has pushed higher over the years in spite of them. Of course, past performance is no guarantee of future results. However, looking at the largest pullbacks in the S&P over the past 7 years compared to the end of year finish below sheds more light on the subject. (Source: Bloomberg)

Year                       Largest Pullback That Year            Finish That Year

2010                                       -16%                                                      +13%

2011                                       -19%                                                      0%

2012                                       -10%                                                      +13%

2013                                       -6%                                                       +30%

2014                                       -7%                                                        +11%

2015                                       -12%                                                        -1%

2016                                       -11%                                                      +10%

2017                                       -3%                                                        +19%

A lot of the appeal of investing in the stock market is based on how much a company is expected to earn. If earnings are good, then the stock price should move accordingly. We feel that we will continue to see good earnings news in the near term (that could change of course). Manufacturing data across the globe is robust, the job market is strong, and global growth is picking up. However, there are some negative forces that we must keep an eye on.

  • Trade war possibilities
  • Other banks around the world tightening the money supply
  • Rising interest rates and stock prices outpacing earnings.

I have a video/slide presentation on my website that breaks these thoughts down into a very understandable format. If you would like to view it go to www.carawanfp.com, click the Resource Center tab, click Investment, then click “5 Smart Investing Principles”. The presentation is only 17 slides long and takes less than 3 minutes.

 

Derek Carawan is a LPL Financial Advisor and LPL Registered Principal / Securities offered through LPL Financial/ Member FINRA/SIPC and may be reached at, www.carawanfp.com , 919-870-8181 or derek.carawan@lpl.com .

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal planning advice. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

No strategy assures success or protects against loss. Investing is subject to risk which may involve loss of principal. An index is unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted.

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