The agreed upon definition for a stock market correction is a drop of 10% or more. Once the drop hits the 20% number then it becomes a “bear” market. And once the drop hits the 40% number it becomes… well let’s just not go there.
Between roughly January 29th and February 9th, the stock took investor’s on a wild ride with huge drops and gains in each trading day and two days with losses of over 1000 points on the Dow Jones Industrial Average. At the end, the stock market had officially reached the correction level of losing 10% from its high point. It all happened so fast that I think the average investor might have missed it.
Since February 9th, the stock market has made back nearly half of the losses.
Typically, a 10% market correction takes longer than nine trading days to happen and certainly recovery of those correction drops takes months, not days.
In my opinion, this market turned south on one bit of news; that wages for American workers was on the rise. Then people started asking the questions, “if wages are on the rise, doesn’t that spur inflation? And if inflation is on the rise, doesn’t that mean the Fed will raise interest rates?” Then those questions led to the big one. “Can the U.S. economy grow and perform well in an environment of higher interest rates while it barely grew at all over the past ten years when interest rates were zero?” No one knows the answer to the last question so it creates a very big question mark. And my belief is that investors decided to take some of the profits they have made over the past eight years and sit out for a while and watch the economy as the fed raises rates.
Now, there are people who believe that the economy is growing at a strong enough rate that higher rates won’t have much of a slowing effect and that it could function quite well if the ten year treasury moved back into a more normal range of 4% to 5%, which would be about twice what it is now. So those people took the opportunity of the drop to do some bargain buying and hence the bounce back up.
So, which group is right? Who knows? This is why timing the market is such a hard game to play. Corrections come and go, some more quickly than others. Smart investors stay with their plan and don’t get caught up in the emotions of a correction.
These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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