Market corrections are regular and healthy occurrences, and the rebound to new highs may already be underway.
CNBC reports that U.S. equities markets lost more than $3.18 trillion this week as they suffered their worst weekly sell-off since the 2008 financial crisis. So, should you should divest yourself of all stocks and hide your money under the mattress until the panic subsides?
No, of course not. Stock market corrections occur with some regularity and are to be expected. They actually are healthy and beneficial because they help to check and rein in what Alan Greenspan famously called “irrational exuberance.”
Market corrections don’t mean the market is collapsing; they mean the market is consolidating and correcting equities valuations that got ahead of themselves and were artificially inflated by the bull run. This is a good thing because it sets the stage for further gains based on a more accurate assessment of market and corporate fundamentals.
Historical Context. “There have been 26 market corrections since World War II, with an average decline of 13.7% over an average of four months,” reports CNBC’s Thomas Franck. “Recoveries have taken four months on average,” and the upward trajectory of the market has remained intact.
There is “one big caveat”: if we fall into bear market territory, then “the losses stretch to 20 percent [and] there’s more pain ahead and a longer recovery time,” Franck notes.
But for a bear market to occur, we’d almost certainly have to suffer a recession, which is exceedingly unlikely, given the underlying strength of the U.S. economy and the U.S. consumer.
Right now, the equities markets are overreacting to fears of the coronavirus and how it might adversely affect Chinese economic growth and world economic growth more generally. CNBC’s Fred Imbert reports:
“What we’ve seen the last couple of days is pure liquidation,” said Keith Lerner, chief market strategist at Truist/SunTrust Advisory. “Investors are saying ‘get me out at any cost.’”
“The most important dynamic in the market is uncertainty,” Lerner added. “People are selling first and asking questions later.”
When traders and investors are selling first and asking questions later, that’s a surefire sign of an overreaction and an overshoot to the downside.
Moreover, just before this correction occurred, the major stock indexes—the SPY, QQQ, and DIA, for instance—had all hit 52-week highs. The market had been climbing higher and higher almost without interruption for some time. Thus we were due for a pullback. It was inevitable.
Inevitable Correction. The coronavirus, in fact, may have been the occasion or pretext for traders and investors to do that which they had been angling to do for weeks, but never did because of irrational exuberance and the fear of missing out on even greater highs. As Stephen Auth, CIO of Global Equities for Federated Hermes, told Fox Business:
This correction was overdue. We had a 17% run without a pullback. The last 16 times we’ve had something like that, we’ve had a 10% correction…
The coronavirus is a good excuse for one [a correction]. It is scary. We don’t know, really, how it’s going to play out. But at the end of the day, the global economy will bounce back from this. It’s at worse a short-term hit.
The “fact is,” writes Luke Burgess at Energy and Capital, “last week the Dow was trading 11% over it’s 200-day moving average. So, again, a market correction was inevitable with or without coronavirus.”
And a rebound off of our current lows is just as inevitable, and sooner than you might think.
In the three weeks before Christmas 2018, for instance, “so-called ‘U.S. equity style boxes’ made popular by Morningstar all fell by between 15-19 percent,” writes Rob Isbitts in Forbes. Lower-volatility stocks, meanwhile, suffered declines of 10-20 percent, he adds.
“The impact was so severe across the board, it wiped out all, nearly all, or more than all the gains of the prior year and a half in all nine [major] stock market segments…” Yet, “the stock market rebounded quickly after Christmas [2018], and that rally has stretched into the start of 2019,” Isbitts explains.
In fact, the rally extended throughout 2019 and into 2020 almost without interruption, as Annekan Tappe observed in a Dec.29, 2019, year-end analysis of the equities markets for CNN Business.
US stocks had a fantastic year in 2019, with all three major indexes climbing more than 20 percent. But that performance came at the price of volatility and uncertainty.
Last year ended on a sour note, with the worst December since the Great Recession leading to the first annual stock market losses in three years. This year was a rebound—and then some—but it wasn’t easy.
Trade and the Fed, the two big themes of 2019, pushed and pulled on equities. The Fed won out, and stocks soared. Investors got quite a bit of whiplash along the way.
The whiplash continues; but so, too, do the market’s gains. Stay invested and prepare for the next leg-up: because, as sure as the sun rises, it’s coming—in spite of the coronavirus.
Feature photo credit: Investor Junkie.