A correction is defined as a decline of 10% or greater from a recent high in the financial markets. Corrections can last anywhere from days to months, but few have lasted longer. Recently, we’ve seen a bumpy ride, and many people are looking for context as to what this might mean for their financial future.
Stock prices have bounced in-and-out of correction territory, as investors attempt to measure the economic impact of the COVID-19 virus. During periods of volatility, it’s important to remember that stock market corrections are not unusual and represent a normal part of the investing cycle. While the performance of any single year can deviate significantly from historical norms, on average, we see bear market corrections of 20% or more about every 3-4 years. The current situation of the market reacting to COVID-19 is impactful, but markets adjust all the time.
Have we reached the bottom? While many businesses and organizations shut down (an essential component of stopping the spread of COVID-19), we will probably continue to see more bad news. As corporate earnings and forecasts are delivered, anything bleak will create a corresponding negative reaction. We expect this. Having said that, we do believe things will eventually improve and return to normal. The stock market is a forward-looking mechanism. We find comfort in that.
Coordinated Response. There’s little doubt the coronavirus presents a challenge to the global economy. Already, we are seeing a coordinated response from healthcare organizations and federal agencies. In March 2020, the Federal Reserve cut short-term interest rates by half a point, and the International Monetary Fund and G7 officials pledged to support economies impacted by the outbreak.
A Reality Check. While significant market downturns can certainly be unsettling, it helps to view corrections from a wider perspective. This is the 7th correction the stock market has seen within the last ten years. You may remember late 2018, when the market benchmarks fell nearly 20% when the Federal Reserve continued to raise shorter-term interest rates as the U.S. economy strengthened.
In fact, if we widen our gaze further, we can see that this is actually the 27th market correction since World War II. Past performance can’t predict future market results, but markets have still managed through the process of price corrections.
Corrections remind us of a reality we don’t like to think about: stock prices can’t always go up. When prices drop, it can be tempting to give in to our emotions and react, but patience and caution may be warranted.
Declines also provide an environment to test your risk tolerance and ensure that your financial strategies and asset allocations are aligned with your long-term objectives and appetite for risk.
Strategically Strong. For our clients, their investment strategy has been created to reflect their time horizon, risk tolerance, and goals. As an investor, getting through a correction means having the poise to ride out short-term volatility. If you are not working with an advisor or your advisor is not making moves and decisions on your behalf, we would be happy to speak with you regarding a second opinion.
Sources:
CNBC.com, March 3, 2020
Acorns.com, February 27, 2020
CNBC.com, February 27, 2020
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on March 29, 2020 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.
