"I Know I'm Buying at the Top...Should I Wait?"
A common refrain we are hearing from both our most sophisticated investors and those with the least experience is “when is the correction coming?” Before we move forward, let me explain a little terminology: (1)
|Percentage Drop:||Defined As:||Feels Like:|
|Less than 5%||Pause||Swatting a nat|
|10% +||Correction||A roller coaster ride with the stomach flu|
|20% +||Bear Market||Being kicked in the groin by an elephant|
|50%+||Crash||Open-heart surgery without pain medication|
Why the fear? It’s been a jaw-dropping 41 months since the S&P 500’s last correction of a sell-off of 10% or more when it usually happen once a year: (2)
(A history of declines 1900-2013)
|Type of Decline||Ave Frequency||Ave Length||Last Occurrence||Previous Occurrence|
|-5% or more||About 3x a year||47 days||October 2013||August 2013|
|-10% or more||About 1x a year||115 days||October 2011||July 2010|
|-15% or more||About every 2 yrs||216 days||October 2011||March 2009|
|-20% or more||About every 3.5 yrs||338 days||March 2009||October 2009|
Is it rational to think we are overdue for a correction of 10% or more after digesting this data? Yes…you should prepare yourself mentally for such a pull-back. It will also happen quickly and selling will create more selling. The pendulum will swing wildly and quickly in the other direction. So, you should be asking ‘what are you guys going to do about it?’ In one word….nothing. If we had taken you out of the market completely when we felt that pull-backs were upon us, you would have missed the last four years of virtual escalator-like returns.
While we know that a 10% or more correction is long overdue, there are too many compelling reasons to keep you diversified with appropriate amount of risk:
- We believe interest rates continue to and most likely will remain accommodative into 2016.
- We believe GDP will continue to grow at an annualized 2-3% range for the next year keeping inflationary pressures low.
- Inverted yield curves always lead to recessions and we do not believe we are near such a curve(3).
- We believe Quantitative Easing (QE) in Europe and Japan will continue to keep foreign interest rates low pushing more foreign investments into the US.
- We believe foreign investments are finally attractive alternatives to some of our domestic, large cap investments.
- We believe gas prices will continue to remain low in the foreseeable future.
While it is inevitable that a correction is somewhere on the horizon, and we will all feel a bit queasy. However, there are more reasons that keep us optimistic moving forward. Downward movements should be an opportunity for money on the sidelines to move in and make a trench short-lived. We continue to provide defense to your portfolios and expect some short-term pain ahead. A correction could be in order, but so should a market movement back to positive territory.
“A Field Guide to Stock Market Corrections.” Joshua Brown. The Reformed Broker. August 20, 2013. http://thereformedbroker.com/2013/08/20/a-field-guide-to-stock-market-corrections/
“How often should investors expect 5% market corrections?” John Spence. Smarter Investing by Covestor. August 4, 2014. http://investing.covestor.com/2014/08/often-investors-expect-5-market-corrections
“This Market Measure Has a Perfect Track Record for Predicting US Recessions.” Sam Ro. Business Insider. July 8, 2014. http://www.businessinsider.com/inverted-yield-curve-predicts-recessions-2014-7