Anatomy of a Correction
February 28, 2018
February is over, but the stock market correction (arbitrarily defined as a decline of more than 10% from a previous high) that began at the end of January is still with us. Until this week, it looked as if the market would recover rather quickly with minimal backsliding. However, back-to-back declines on February 27 and 28—totaling –2.7% on the ACWI equity index of global stocks suggest that this will not be the case.
But do not let this week’s declines concern you, as they are perfectly normal during market corrections, while a rapid recovery to prior highs without any intervening drops would be most unusual. Nearly every stock market correction in history features a double bottom, with the second one occurring 3 to 8 weeks after the first and at around the same price level. If the current correction follows this playbook, a secondary bottom should occur within the next 1 to 4 weeks (i.e., before the end of March). We would not be surprised to see the major indexes drop another –5% from here before finally rebounding. This may not happen, but you should be prepared in case it does.
The process of finding a bottom is always a bit ugly: big market moves in both directions, hard-won gains wiped out in a flash, individual stocks sometimes moving 10% in a day, and of course, fear all around. Typically, investor anxiety crests around the time of the second bottom rather than the first, meaning that fear may not yet have peaked. Investors, being human, often want to get out and seek shelter until the storm passes, most often near the lows. This would be a mistake.
Identifying a stock market bottom is essentially impossible: mere mortals can do so only by sheer luck. And getting out of stocks during times like these can be riskier than staying in because prices move so quickly. Even if you are correct and stock prices go lower after you sell, you may not be able to buy back in before prices rise above where you sold. Believe me, we tried this more than once many years ago and concluded that it was that it was a losing battle.
How do we know for sure that this correction won’t morph into a true bear market, with a decline of more than 20%? We don’t, but the evidence argues against this, as we discussed at length in our recent quarterly newsletter. And the Fed wouldn’t be raising rates if the economy didn’t appear to be on solid footing.
Of course, the Fed could be wrong and so could we. But the same caution applies to finding a bottom in a bear market as in a correction: it’s basically impossible. Instead of attempting to time the market, invest for the long term and try to ignore short-term gyrations, as they are just noise in the bigger picture. You’ll probably sleep better as well.
Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory
Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory
Nick Nejad, CFA
Director of Investment Research, KCS Wealth Advisory
KCS Wealth Advisory is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with personalized financial, estate and tax planning services.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Other methods may produce different results, and the results for different periods may vary depending upon market conditions and portfolio composition. This email does not represent an offer to buy or sell securities.
Investment advisory services offered through KCS Wealth Advisory, an SEC Registered Investment Adviser. Clearing, custody services and other brokerage services provided to clients of KCS Wealth Advisory are offered by Fidelity Brokerage Services LLC, Member NYSE/SIPC. Fidelity and KCS Wealth Advisory are unaffiliated entities. When securities are being offered, they are offered through Mutual Securities, Inc., Member FINRA/SIPC. Supervisory office located at 807-A Camarillo Springs Road, Camarillo, CA 93012. KCS Wealth Advisory is not affiliated with Mutual Securities, Inc.
Electronic communications are not necessarily confidential and may not be delivered or received reliably. Therefore, do not send orders to buy or sell securities or other instructions related to your accounts via e-mail. The material contained herein is confidential and intended for the addressed recipient. If you are not the intended recipient for this message, any review, dissemination, distribution or duplication of this email is strictly prohibited. Please contact the sender immediately if you have received this message in error.