Dear Mr. Market:
Have you seen the movie “Groundhog Day”? If you haven’t it’s comedy-fantasy from 1993 starring Bill Murray. In this movie he portrayed a Pittsburgh weatherman who was on assignment to cover the annual Groundhog Day event in Punxsutawney, Pennsylvania. Murray’s character ends up being stuck in a time loop where no matter what he does he ends up repeating the same day again and again.
Until just the past couple of days it feels like the stock market was also trapped in some sort of Groundhog Day paradigm. We have not experienced a correction in over 15 months and no matter what the headline the results on the markets where the same as the day prior; green, positive tickers, and smooth sailing. We just saw the best January in 20 years after a year where the S&P 500 recorded a positive return every single month for the first time ever. All these records transpired with the lowest market volatility ever. So what just happened?
Did the groundhog pop his head out and cast a different shadow than anyone was expecting? No…not really. Everyone we know (layman or expert) has been saying eventually it would end. Nothing keeps going up forever. While we disagree with lightweight analysis that stocks are overvalued, the bull market eventually has to take a breather in order to make a final push higher. There is no recession in sight so what we’re finally seeing is a long overdue correction.
What is a stock market correction?
It’s been so long that it might be helpful to refresh your memory! First and foremost, you must recall that prior to Groundhog Day (sorry…couldn’t resist!), stock market corrections happened all the time! On average they occur once every 357 days, or at least once a year. They’re part of the economic and stock market cycle and for a healthy market to advance you actually should want to see them pull back every so often. We have strong fundamentals right now and things are trending in the right direction otherwise we wouldn’t be minimizing this recent market action.
By definition a correction is -10%. (a pullback being in the -5% range) A full on bear market is where we would see -20% or more from peak to through. With the average correction, not only can it not be predicted, but by the time people figure it out it’s too late and the market is back to moving higher.
It won’t last long…
Also be aware that this correction is very likely to be short and sharp in nature. Because we’ve had such minimal volatility and enjoyed a strong market the natural instinct will be for many to think this is the sign of massive pain on the horizon. Realistically you can expect -5% to -10% almost every year but that drawdown not only lasts just a few weeks but also reverses quickly. Most people who bail never buy back in time to make up their losses.
What to do?
Knowing that this is likely a run of the mill correction you need to sit tight and turn off the television. Go do something fun and healthy; the last thing you should do is listen to the media or read about this massive correction that will inevitably be the start to the next Great Depression.
If you have an investment strategy NOW is the time to stick to it. Our clients will see us selling somethings that have gone up during the correction (negatively correlated instruments) and buying investments that might be on sale relative to last week. If you don’t have a strategy, this is not the time to devise one based on emotion or recency bias.
What not to do!
The last thing you should do is panic or bail from your current strategy (assuming you had one that is worth following and made sense going into this turbulence). If anything, now is the time to finally dust off that shopping list and begin either averaging into new positions or existing ones that have been hit the sharpest. This advice basically tells you the opposite of what the average person will do (sell). Don’t get us wrong…there are times when it makes sense to sell but just don’t do it on days when the market peels off two percent!
In summation, although it’s early, this is a textbook correction that is begging to be bought! Opportunities like this to buy on a dip have seemingly vanished over the past year so if you’ve been in cash and missed another 20% plus year…you may want to reevaluate that strategy.