ARE WE DUE FOR A MARKET CORRECTION? As we previously reported, the expectation of President Donald Trump s pro-growth agenda sent the market to new highs during the 4th quarter of 2016. He plans to focus on tax reform, deregulation, and infrastructure spending. These actions could lead to consequences of faster growth, higher inflation, and rising interest rates. The stock market has continued to experience earnings growth and new highs thus far in the first quarter of 2017. All of this begs the question; Are we due for a market correction? The answer is a definite maybe. However, corrections are a normal and frequent occurrence in the markets as reflected in the following chart that shows all 5-9% corrections that have occurred in the S&P 500 since 2009, and how many days it took to recover those losses What should we be doing to prepare for the correction? It depends. It depends upon each of our individual situations and circumstances. Peter Lynch said, Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. Regardless of our individual situation or circumstance, we must avoid emotional decisions.
One thing is certain, no one can predict the when and magnitude of a correction. No one can time the market. Market timing requires two perfect decisions; when to buy and when to sell. Nobody makes two perfect decisions. Often, getting out means missing out, this is known as opportunity cost. The amount you forgo as a result of taking another course of action. Again, this decision is often driven by emotion and fueled by the financial media. Remember the headlines in early 2016? On February 23, 2016 The Times UK reported, The start of this year has been the worst for financial markets since the onset of the Great Depression, with stock prices slumping around the world amid mounting concern over the situation in China. 1 Those who bailed out or stayed out missed a significant market rally. Market corrections also present opportunity. For those who happen to find themselves with unexpected cash or who may be dollar cost averaging into the market, the correction presents the opportunity to acquire more shares at a lower price. Again, we must resist the urge to try to time the markets. 1 http://www.thetimes.co.uk/tto/public/assetfinance/article4667135.ece
The chart above shows that the S&P 500 has been negative at some point in every year going back to 1980. In this thirty eight year period the S&P 500 finished in positive territory twenty eight times (twenty nine times if we count year to date in 2017). If we include 2017 in the positive column, the S&P 500 finished in positive territory about 76% of the time. While past performance is not indicative of future results, Bloomberg s consensus earnings growth rates estimate for the S&P 500 Index as of February 23 rd for 2017 is 19.12% and 11.92% for 2018. 2 While short term news will impact the markets, it is earnings that ultimately drive equity prices. 2 http://www.ftportfolios.com/commentary/marketcommentary/2017/2/23/a-snapshot-of-the-current-bullmarket-in-stocks-using-the-sp-500-index
Finally, this chart shows all 10% - 20% corrections in the S&P 500 since 1988, as well as how many days it took the market to recover from each correction. We want to use knowledge to overcome emotion when viewing decisions regarding your financial plan. Please contact us if you have any questions, concerns, or a life event that needs to be considered in your wealth planning process. All our best, Aron D. Huddleston, CFA David P. Blair Senior Vice President Associate Vice President Senior Portfolio Management Director Senior Portfolio Manager Financial Advisor Financial Advisor aron.huddleston@morganstanley.com dave.blair@morganstanley.com Ph. 402-399-6190 Ph. 402-399-6191 NMLS # 1514388 NMLS # 1494475 Office Address: 13625 California Street, Suite 400 Omaha, NE 68154 Team Website: www.morganstanleyfa.com/thehuddlestonblairgroup
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