Correction or Bear Market?

Next to love, balance is the most important thing.”  John Wooden

 

As global markets continue their slide it is time to take a closer look at where we are, where we’ve been and where we might be headed while keeping Coach Wooden’s advice in mind.

 

This Bull Market began in March 2009 during the late stages of the Great Recession. From peak to trough in 2008-2009 the S&P 500 declined by 57%.  The catalyst for the downturn was a combination of over leveraged consumers, widespread mortgage fraud, coupled with rapid and massive declines in home values across the US.  In many ways, we continue to feel the effects of those events to this day.

 

Home ownership remains on the decline and home values in many places have yet to reach to pre-crash valuations.

 

Many emotionally driven investors who sold out in 2009 remain on the sidelines to this day.

 

In spite of all this, smart investors who held on, rebalanced their portfolios, adhering to the principles of asset allocation and diversification, reaped a harvest unimagined during the depths of the decline over a decade ago.

 

A “Correction” in Wall Street terms is a decline of more than 10% but less than 20%.  A “Bear Market” is defined as a decline of more than 20%.  The last time we saw such a correction was in 2011.  Using historical data going back to the late 1920’s, the average stock market correction is roughly 13% over four months.  The recent market decline has taken the S&P 500 into correction territory and the media is loving it.  Pundits everywhere are being trotted out in front of cameras foretelling darker days to come.

 

Don’t believe them and don’t allow the media’s hype to guide your thinking.

 

The economic backdrop is strong as evidenced by low unemployment, near record growth in US GDP, and steadily growing earnings and dividends across the spectrum of publicly traded US companies large and small.

 

You may have heard the quote that “markets tend to get ahead of themselves” on both the upside and the downside.  Markets are nothing more or less than a discounting mechanism and reflect expectations for future economic growth six to twelve months into the future.  At the moment, most US economists continue to predict steady growth for the foreseeable future.

 

The tug of war between interest rates and stock market valuations will continue and could become a catalyst for future corrections.  Rising rates on US Bonds continue to lure investors out of stocks and into the safety of bonds.  As the Federal Reserve pushes rates higher, weaker hands may migrate away from stocks favor of bonds.

 

Market timing is a fool’s errand, but the discipline of rules-based rebalancing has proven to be a superior strategy.

 

Don’t forget Coach Wooden’s advice, balance is just as important in your portfolio as it is in life.

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