Beware of Headlines…
Friday’s drop in the market indices notwithstanding, it appears to me that, based on the internal rotation going on since year-end, this has been a wait-and-see market without much near-term conviction. Nonetheless, as a result of the weak results over last week, having seen the following three separate articles on Friday afternoon. They were, “Is this the correction”, “Is this selloff the ‘Big One’” and “Dow falls as investors fear correction.” Gotta love the financial media…
Let’s see. We were up over 30% in both the Dow Industrials and S&P500 last year. Now, in the first few weeks of the following year, we have those two indices off about 4% and 2.5% respectively (1) and, all of a sudden, the medias are calling for a lifeboat drill?
Based on conversations this past week, I know that message is talking to a lot of folks who don’t want to have a 2008 déjà vu experience with their investments. That uncertainty resonates with them, which makes sense. You just don’t want to take action based on either the uncertainty or a headline. The media is conveniently overlooking the fact that neither the economy nor the markets much resemble where they were about five years ago…in good ways.
What about a correction?
A correction is Wall Street talk for a market drop which can last a few weeks to a few months. They’re pretty common and can happen anytime over the life cycle of a bull market – even one with improving fundamentals. A correction involving a downward move of around 10 percent is often considered a way to re-charge the markets, as many who’ve been watching the rise are drawn in to invest by the lower prices.
According to John Prestbo of the Dow Jones Index, we’ve had 27 corrections of more than 10% that didn’t turn into full-blown bear markets since World War II. That’s an average correction of roughly every 20 months. However, this average doesn’t mean they’re evenly spaced out. (A bear market is considered as a drop of 20 percent, or more.)
John’s research showed that, over the last 66 years, a full quarter of these sell-offs had occurred during the 1970s in the Golden Age of Market Timers with another 20 percent occurring during 2000 – 2010. In other words, almost half of all the 10 percent or greater corrections took place in the context of a secular bear market cycle. We are definitely not riding on that cycle right now.
Correction does not equal a recession
Due to the fact that we’ve had fairly steady price appreciation in the current market for almost 5 years, many believe that the market “must” have a correction. I disagree. This type thinking also suggests that if the roulette ball lands on red six times in-a-row, then it must land on black next. Not hardly. While the herd mentality could make this correction fear turn out to be a self-fulfilling prophesy, it looks to me as if the market is attractively valued at today’s prices. My market view has earnings per share growth accelerating, positive relative value for stocks versus bonds continuing and there’s also the potential for an upside economic surprise.
I believe the underlying fear is that the correction will cause us to fall back into a bear market. Not likely now. If you’re concerned, follow the Index of Leading Economic Indicators. It has forecast the last two recessions.
The Conference Board collects data from 10 forward-looking economic indicators to create the index. In December, it ticked up again, keeping a string of monthly gains intact. Before a recession, the indicator will have a streak of monthly declines. When it’s higher, it’s a precursor of economic growth. By the way, similar indices in other countries are also rising.
If and when a correction comes, just roll with it by focusing on the market’s valuation and staying invested for the long term. Market timing is impossible – don’t let the media’s headlines cause you to act now and repent later…
Cheers!
Mike
509-747-3323
(1) CNBC, 24 Jan 2014
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly.http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment. Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
