"I Know I'm Buying at the Top...Should I Wait?"

question markA 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
5-10% Dip Mosquito Bites
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
80%+ Depression Death

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.

 

  1. “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/
  2. “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
  3. “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

 

 

• The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. • No investment strategy can guarantee success or protection against loss. Investing involves risk, including loss of principal. • Investing in specific industry sectors may be subject to greater volatility. • International and emerging market investing involves special risks such as currency fluctuation and potential instability and may not be suitable for all investors. • The economic forecasts set forth in the presentation may not develop as predicted. • The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.