Brutal Correction

Back on October 15th in market commentary I wrote, “A scenario is developing which could push stocks further into the red in the coming days and weeks…”

On October 20th I wrote, “I do not expect the current situation to resolve itself quickly.”

To be fair, the stock market could have moved higher from each of those dates, but it hasn’t, the selloff has intensified.  There is one primary reason I felt it could get worse before it gets better.  This is a mature market.  I don’t believe the I bull market is over.  I do believe, for it to continue advancing, values need to be reset and that is what is happening.

Those investors with more than a few years of investment experience know that periodically we enter into corrections and occasionally bear markets.  The difference between a correction and a bear market has to do with the degree of the decline.  Bear market also usually last much longer.

The primary culprit of the current sell-off is interest rate related.  The good news is that a statement by the Fed that they are going to review future rate hikes and reconsider their plans could stabilized the market.  This is likely to happen if the situation deteriorates any further.  A credit/consumption-based economy is very sensitive to interest rates.  Like a ballast, interest rates have the potential to tip the stock market if they rise to far too fast.  Several real estate reports have recently indicated a slow-down in activity being attributed to higher interest rates.

Corrections are a necessary part of investing.  They allow the market to reassess value.  Higher interest rates require future cash flows for stocks to be discounted at a higher rate causing them to be worth less. Once the market has revalued stock prices based on higher interest rates the bull market underway should continue.  A pause in rate hikes could make this process smoother.

It is possible we could see the situation deteriorate further.  If it does investors are best served to hold tight.  Often the market overreacts in this type of situation but eventually sprints higher.  You don’t want to be out of the market when that happens.

Of course, investments in money markets, bonds and gold can provide some refuge during difficult stock market conditions.

Posted in Uncategorized.

Brian Dightman