Is It Time For A Correction?
We’ve been hearing it for months. A stock market correction is coming. It’s going to be soon. Definitely due.
In fact, every article, blog, TV show, financial publication and market pro says it’s coming.
Oh, and here’s a freaky number. I read that it has been over 1042 days since we corrected 10% or more. Holy crap! That’s 3 YEARS!
Typically we correct 5% or more several times per year. A 10% correction comes about every year or so, and a 20% correction about once every four years.
So the big question for me isn’t when or how much. The big question is why haven’t we corrected by now?
Here’s why I think we haven’t corrected yet:
1. U.S. markets are kind of the only game in town. Where else on the globe would you invest?
2. We have an easy money policy from the Federal Reserve
3. Pretty low inflation
4. Improving economic growth
But I really think this market is focused on one thing. Actually it’s focused on the right thing for a change. What “one thing” you ask?
When you take out all the geo-political events, natural disasters, rhetoric and noise, corporate earnings are what drive the market higher. Stocks go up because the underlying companies are making money because we are spending. Therefore, the stock value of these companies continue to rise fueling markets higher. Earnings have helped this market rally along with the other four things I mentioned.
My opinion is that we are long overdue for a correction.
Now I don’t know if it will be 5%, 10% or larger. I do know that even the best athlete needs to slow down and catch their breath from time to time. Our equity markets are no different. Personally, I’d like to get it over with, like pulling that band aid off my hairy arm.
I also have no idea of the timing. It could be tomorrow or a year from tomorrow. Unfortunately, my crystal ball is in the shop and I have no way of knowing!
And neither do you.
What can we do? Should we go to cash? Should we get more conservative?
That depends. First, don’t panic and freak out. You’ve been through this before. Stay positive, it won’t necessarily signal a Bear Market either.
I tell all my clients to assess their risk tolerances in calm markets. Don’t do it when things are horrible and don’t change it when things are fantastic. You won’t get a true assessment because it will be based on sheer emotion.
Moving to all cash might be a mistake. What if the market goes higher? Are you willing to risk missing out on further returns just to protect capital? How on earth will you know the right time to jump back in?
The best advice I can give is get a diversified portfolio. Spread the risk to various asset classes. The more the better.
You could even increase your alternative investments percentages. Alternatives do not move along with the broad markets. Sometimes they appreciate when the stock and bond markets correct.
You could hoard some cash. Remember, these corrections are also an opportunity to buy at cheaper prices. Take advantage of it.
The truth is no one knows when a correction is coming, the length or the severity. I just know there will be another one. If you liked my article, why not subscribe for free right here? I’ll get my underpaid virtual paperboy to toss one in your inbox every Friday.