Do you remember this from school? Is it a picture of two faces nose-to-nose, or a picture of a vase? I bet you can see both, now that you’re looking for them, but which one did you see first?
The stock market was a bit crazy today. We have been waiting for something like this to happen for a while now. The stock market bottomed in March of 2009 when the Dow Jones Industrial Average hit 6547. Today it sits at 16,141. That is a HUGE run over the past five years. It was due for a pullback. And now we have one.
Technically, a correction is when the stock market retreats 10% from its high point. On the Dow, the high point was 17,267 last month. At 16,141, we are only 7% off the highs, so technically, we are not yet in a correction. (Commonwealth Chief Investment Officer Brad McMillian wrote a good blog article on this very topic this week.)
History tells us that a 10% correction happens about once a year, although the last time there was one was back in October of 2011. The average duration of a 10% correction is about 115 days. (American Funds has compiled this, along with other interesting statistics, here.)
Regardless of what you call it, and no matter if we are off 7% or 10%, a correction looks volatile. Today was a rollercoaster ride. The market was down 350 from the opening bell, rallied, then fell 460, before rallying again and only closing down 173 points, where it now sits at 16,141.
Can’t stomach volatility? Now might be a good time to take some profits, assuming you’ve enjoyed the run up these past five years. I don’t think you should sell everything, because timing the market is difficult and it just doesn’t usually work. But there is nothing wrong with reallocating and moving some of your profits to other sectors.
Are you one of those, “buy low, sell high” kind of investors? You’re in luck. Get ready, I think we’ll have that buying opportunity. Good stocks get thrown out with the bad ones during corrections, and if you’ve been waiting to add some equities to your portfolio, now might be a good time.
So far, every correction has been followed by a bounce. The length and depth of each correction are different. How it looks depends on your perspective and your time horizon. So, did you see two faces, or a vase?
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks.
Joe Smalley is a financial advisor located at 213 East Saint Joseph, Lansing, Michigan, 48933. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 517.487.4850 or at www.smalleyinvestments.com.