Through Monday’s close, the SP 500 is off its highs by about 11% and down around 8% on the year. This correction has been incredibly swift with the market dropping more than 6% in just two sessions.
There are a few things we think are important to consider. First, markets experience corrections on a regular basis. Historically, the market has experienced a ten percent decline roughly once every year. This correction was the first in over 1400 days. We’ve been long overdue.
Every correction feels awful regardless of how it plays out and the “blame” for the correction seems like a terminable problem (which eventually gets resolved). This time it may be China and next time it will be something entirely different. The important thing to consider is that none of that really matters. Risky markets will (must) always have substantial periodic draw-downs or they wouldn’t provide any sort of return premium.
While we do believe the market is overvalued relative to historical average prices, it is not certain that this correction will result in a major bear market, and the odds are that it will not. Historically, severe bear markets are associated with monetary tightening and recessions, which don’t appear to be imminent currently. (In the short run, the historical evidence suggests a bit of a rally or bounce in the market. For more please go here.)
Finally, now is as good a time as any to reflect upon your financial plan and investment strategy. Determine if your annual savings amount is adequate, or if you are retired, whether your withdrawals are reasonable if the markets do have a period of sustained poor performance. Planning on ten percent annual gains in the future is probably unrealistic. Also, ask yourself if you have a well-defined investment strategy that you can rely upon, and more importantly, stick with.