Correction Around the Corner? 9/1/2016
Markets have witnessed two corrections so far this year and fears seem to be mounting that another is right around the corner. The first correction took hold following the Fed rate raise last December with the S&P 500 falling approximately -14% before markets began to stabilize. Despite the dark promises of pundits, the markets began to move higher from there and didn’t face another hiccup until the short-lived Brexit, when markets experiences a 2 day panic of -6% before reason prevailed.
What’s important to realize is that normal markets typically experience a -10% or so correction about once per year, and two -5% or so corrections per year. There are numerous -3% pullbacks. Most times an acorn falling on your head is just an acorn falling on your head. It doesn’t mean the sky is falling.
Corrections are not worth getting worked up about. They are basically short lived sales on the market, really no different than when your favorite store holds its Labor Day Clearance Sale except they aren’t scheduled a year in advance. Therefore, corrections represent significantly more opportunity than risk. A correction rarely slips into a bear market. It’s far safer to buy during corrections than sell, absent recession.
At this point, my view is that we have a good probability of a near term correction, particularly if the Fed decides to raise rates in September or October. There are no guarantees that correction occurs, but if it does I’m anticipating something in the area of -6% at this point.
If the Fed raises rates next month, it may be deeper. However, while I see the Fed holding off until December as the highest probability, they may raise in October. September is probably too early — I think the Fed wants to hold fire until there is greater visibility in how the Brexit will actually play out in Europe. That being said, I’m not convinced my crystal ball works better than anyone else’s.
A rate hike doesn’t really matter, though. It may cause near term market gyrations, but the U.S. economy can withstand a raise and if the markets do tank it should be considered a buying opportunity unless we’ve moved into recession.
Thanks to the media, investors often confuse vanilla corrections with damaging bear markets. Corrections and bear markets are materially different, and bear markets can be further differentiated into cyclical bear markets and recessionary bear markets. Recessionary bear markets BITE. Cyclical bear markets are generally simply nippy.
A solid investment plan is all that is needed to endure standard corrections and even cyclical bear markets. Adjustments in investment plans should only be made when the economy moves into recession.
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To Smarter Investing,
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.