CASTING OFF IV: MARKET THOUGHTS
By David Hone, CFA
When the stock market starts falling especially like it has in recent days, many people reach their pain threshold given sudden short term losses. While this fear may seem appropriate, it turns out that less than one in five corrections actually turn into a bear market.
First, let’s define a market correction and a bear market. A correction is defined as a decline of at least 10% but not more than 20%. Historically, corrections have been a 13% decline and averaged 54 days. A decline of over 20% is a bear market and the 14 bear markets in the U.S. over the last 70 years have lasted for an average of only one year.
Since 1900, there’s been a stock market correction every year on average. To put it into context, one should experience the same amount of market corrections in one’s life as birthdays. Considering that corrections happen fairly frequently and are not the magnitude of bear markets, it can be easier to have less angst about hitting the eject button with your long-term investment plan.
So corrections should be considered normal and natural – until they actually take place! What makes this recent market decline more painful to many is that before last Friday, the S&P 500 had gone 564 calendar days since its last decline of 5%, longer than any period since 1945.
The U.S. economy is now normalizing which means the country’s economic output is moving towards its natural potential. This is good news as it is accompanied by stronger economic data, solid corporate earnings and healthy employment levels. However, accelerating economic growth usually spurs higher inflation. Since we have lived in a world of abnormally low inflation and interest rates, this transition will likely be accompanied by more stock market volatility.
As Warren Buffet said, “The stock market is a device for transferring money from the impatient to the patient.” Patience with a plan is important as the economy and markets transition towards normalization. Despite the current bout of market volatility, LCV Advisors continues to believe that investment success is largely driven by what we can control and patiently adhering to a simple and clear investment plan.
As always, I look forward to your thoughts and questions.
David Hone, CFA
President, Investment Advisor, LCV Advisors LLC
O: 847.574.8645 | C: 917.655.0792
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