An Explanation for Why We Haven’t Seen A Correction


Posted in: Economics, General, Stock Market, Thought of the Week

The conclusion of last week’s Thought of the Week showed that timing corrections in equity markets is impossible. Additionally, our Investment Committee showed that those who believe that a correction is looming for the sole reason that we have not seen one in almost three years, has no historical basis. Since our Investment Committee strongly believes that we are currently in the first secular bull market since the 1990s, we could see the potential for an extended period of time before the next correction.

The last official correction occurred back in the second quarter of 2012. Our Investment Committee has noticed three important observations:

  1. Markets Dip Often: Investors have endured ten separate instances of the S&P 500 declining more than 3% since mid-2012. However, each of these dips was shallow and short-lived/
  2. No Discernable Pattern: These dips were a result of events that could not possible be predicted to any statistically significant level of accuracy. For instance, who would have guess that the Russia and Ukraine would have ended up in their current situation, let alone the impact to U.S. equities?
  3. The Trend is Up: Despite several dips in the market, the overall trend in the S&P 500 has been moving in a very profitable direction.

 

The real question that several market pundits have attempted to answer is why these dips have yet to ignite a real correction and leave investors with deeper losses. Our Investment Committee believes that both short-term traders and long-term traders are the source of this support because each has been incentivized to become buyers when the market dips. For traders, many believe that the strong performance in equities will persist as long as the Fed is involved. By their conclusion, any dip should be bought since the Fed is the true support for the market. For the long-term investors, many are likely using the fear and panic of others in the same manner as our Investment Committee – buying dips to build positions.

Although their motives may differ for traders and investors, the one commonality between the two is that it has paid to buy the dips. Those who have bought the dips in equities over the last two years have profited quite handsomely, and as a result, the Investment Committee believes that one of the reasons that the market has not corrected is because there are so many buyer waiting for a dip because they continue to profit from this strategy. In fact, buying the dip has resulted in profits ten out of the last ten times when the market has sold off more than three percent.

To sum it up, our Investment Committee welcomes a correction with open arms, but they are not waiting for one to arrive. Given that we are in a secular bull market and buying dips has paid well, there may not be a correction for some time. For now, our Investment Committee will continue to look for buying opportunities to profit on the fear and panic of others in the marketplace.

Read this week’s Thought of the Week to learn more about why we haven’t seen a correction in two years.

Click Here for the Weekly Thought

As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.