The Correction About The Correction

Below is a weekly update from our Chief Investment Officer, Dr. Scott Lummer. He co-hosts an audio segment entitled “Market Matters.” In this week's show, Scott discusses the market correction, and the seemingly quick recovery.

I’ve been making the argument in various posts over the past 10 months that a market correction (which most analysts define as the market dropping by 10%) might be possible, but certainly isn’t inevitable or even likely in the very near future. Those arguments fly in the face of whatever pundit seems to be attracting a lot of attention that day by focusing on the worst of the economic news and warning everyone to duck and cover. I’ve presented various facts supporting my case – market data, economic reviews, analysis of previous corrections. But in the battle of which gets more media attention – a bunch of analyses and facts versus outrageous hyperbole about losses and their consequences – I’m completely outgunned. So, I’m waving the write flag. I was wrong and the legions of doom were right. I contend that not only is a 10% market correction likely, but It already happened!

Wait, you say – you know the S&P 500 reached a high of 2011 on September 18 and a low of 1863 on October 15, meaning the correction is only 7.4%. Well, I say round everything to the nearest decile, so a 7.4% decline becomes a 10% decline (I can fudge statistics too). Besides, every other market we analyze had its 10% correction. Small cap stocks incurred an 11% drop as of October 13, emerging markets declined by 12% as of October 16, and developed market stocks had a 16% correction as of October 16. So let’s pretend the market had its 10% correction, and move on. That way, for those who believe there is a “due theory” – that we are due a correction every few years – we can point out that the pressure’s been released, and are no longer due the large decline.

The main reason to assume the correction happened is so we can now focus on the amazing recovery. Over the past nine trading days since October 15, stocks have made up almost all the amount of the decline, rising by 6.6%.

The rise has been relatively steady, with seven of the nine days being winners, and the two losing days being relatively modest declines. The increase in volatility seems to have evaporated as quickly as it arrived. Investors and analysts seem to be focused on economic and profit data, which is mostly positive.

There’s a lesson here – and it’s the much the same lesson we can distill from all stock market (and most other) panics – is “Keep Calm and Carry On.” No good comes out of panic. Most times the best investment decisions we make are the moves we didn’t make. Fiction writers, movies, and television shows mostly portray investment decisions as requiring split second timing – missing the decision point by a few seconds can be the difference between boom or bust (the final episode of Boardwalk Empire, which aired last Sunday, presented that exact scenario). But in real life, those impulses to sell immediately typically result in locking in your losses, and missing out on a nice recovery. The nonchalant ignoring of those impulses will make for a boring plot, but a thumbs-up finish.

Scott Lummer, Ph.D., CFA Chief Investment Officer

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