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Understanding the Market Correction – 2023

You probably saw the news: On October 27, the S&P 500 officially slid into a market correction.

A correction is when the markets decline 10% or more from a recent peak.  In the S&P’s case, the “recent peak” was on July 31, when the index topped out at 4,588.1  On Friday, the index closed at 4,117 – a drop of 10.2%.1 

Market corrections are never fun, and there’s no way to know for sure how long one will last.  Historically, the average correction lasts for around four months, with the S&P 500 dipping around 13% before recovering.2 Of course, this is just the average.  Some corrections worsen and turn into bear markets.  Others last barely longer than the time it took for us to write this message.  (On Monday, October 30, for example, the S&P actually rose 1.2% and exited correction territory.3) Either way, corrections are not something to fear, but to understand – so that we can come through it stronger and healthier than before. 

To do that, we must understand why the markets have been sliding since July 31.  We use the word “slide” because that’s exactly what this correction has been.  Not a sharp, sudden drop, but a gradual slide, like the bumpy ones you see on a playground that rise and fall on the way to the ground.   While the S&P 500 dropped “at least 2% in a day on more than 20 occasions” in 2022, that’s only happened once in 2023, all the way back in February.4    

At first glance, it may seem a little puzzling that the markets have been sliding at all.  Do you remember how the markets surged during the first seven months of the year?  When 2023 kicked off, we were still coming to terms with stubborn inflation and rising interest rates.  Many economists predicted higher rates would lead to a recession.  But that didn’t happen.  The economy continued to grow.  The labor market added jobs.  Inflation cooled off.  As a result, many investors got excited, thinking maybe the Federal Reserve would stop hiking rates…or even start bringing rates down. 

Fast forward to today.  The economy continues to be healthy, having grown an impressive 4.9% in the third quarter.5  Inflation is significantly lower than where it was a year ago.  (In October of 2022, the inflation rate was 7.7%; as of this writing, that number is 3.7%.6)  And the unemployment rate is holding steady at 3.8%.7  But the markets move based either on excitement for the future, or fear of it – and these cheery numbers no longer generate the level of excitement they did earlier in the year. 

The reason is there are simply too many storm clouds obscuring the sunshine.  While inflation is much lower than last year, prices have ticked up slightly in recent months.  (We mentioned the inflation rate was 3.7% in September; it was 3.0% in June.6)  As a result, investors are now expecting the Federal Reserve to keep interest rates higher for longer.  Seeking to take advantage of this, many investors have moved over to U.S. Treasury bonds, driving the yield on 10-year bonds to its highest level in 16 years.  Since bonds are often seen as less volatile than stocks, when investors feel they can get a decent return with less volatility, they tend to move money out of the stock market and into the bond market.

As impressive as Q3 was for the economy, there are cloudy skies here, too.  This growth was largely driven by consumer spending – but how long consumers can continue to spend is an open question.  Some economists have noted that Americans’ after-tax income decreased by 1% over the summer, and the savings rate fell from 5.2% to 3.8%, too.5  Mortgage rates are near 8%, a 23-year high.8  Meanwhile, home sales are at a 13-year low.9  All this suggests that the Fed’s rate hikes, while cooling off inflation, have been cooling parts of the economy, too.

Couple all this with violence in the Middle East, political turmoil in Congress, and a potential government shutdown later in November, and you can see the problem.  Despite the strong economy, investors just aren’t seeing a good reason to put more money into the stock market…but lots of reasons to think that taking money out might be the prudent thing to do.  It’s not a market panic; it’s a market malaise.    

So, what does this all mean for us? 

We mentioned how the markets operate based on excitement for the future, or fear of it.  But that’s not how we operate.  We know that, while corrections are common and often temporary, they can worsen into bear markets.  Furthermore, any decline can have a significant impact on your portfolio, and by extension, your financial goals.  So, while our team doesn’t believe in panicking whenever a correction hits, neither do we believe in simply standing still.  Instead, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending.  We have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell.  This enables us to switch between offense and defense at any time.  This, we feel, is the best way to keep you moving forward to your financial goals when the roads are good…and the best way to prevent you from backsliding when they’re bad. 

In the meantime, our advice is to enjoy the holiday season!  Our team will continue to focus on investments, so our clients can focus on why they invest: To create happy memories and live life to the fullest with their loved ones.  Happy Holidays! 

  

SOURCES:

1 “S&P 500,” St. Louis Fed, https://fred.stlouisfed.org/series/SP500

2 “Correction,” Investopedia, https://www.investopedia.com/terms/c/correction.asp

3 “Stocks rebound to start week,” CNBC, https://www.cnbc.com/2023/10/29/stock-market-today-live-updates.html

4 “S&P falls into correction,” Financial Times, https://www.ft.com/content/839d42e1-53ce-4f24-8b22-342ab761c0e4

5 “U.S. Economy Grew a Strong 4.9%,” The Wall Street Journal, https://www.wsj.com/economy/us-gdp-economy-third-quarter-f247fa45

6 “United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi

7 “The Employment Situation – September 2023,” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf

8 “30-Year Fixed Rate Mortgage Average,” St. Louis Fed, https://fred.stlouisfed.org/series/MORTGAGE30US

9 “America’s frozen housing market,” CNN Business, https://www.cnn.com/2023/10/19/homes/existing-home-sales-september/index.html

   

While the Headlines Gently Weep

With apologies to George Harrison and the Beatles, we know the headlines are nowhere near gently anything.  As you may know, the market has gone into correction territory – meaning a drop of more than 10% below the most recent peak.  (For the Dow, this “recent peak” was near 37,000 back in early January.)  Whenever this happens, the headlines can drive investors crazy!

Despite how those headlines sound, though, corrections are a normal part of market cycles.  The average annual drawdown from a peak to a trough has for many decades been 14%.1  This current decline may reach that territory.  It may not.  It may end up being down more than that average.  Or it may be less.  Nevertheless, the market does this from time to time.  Sometimes there aren’t scary headlines driving it.  Sometimes the headlines are scarier than today’s. 

We can’t know how deep the correction will be, how long it will last, or whether it will become a bear market.  But are we embarrassed we don’t know?  Or worried that we don’t?  No!  Because no one does. No matter how smart the commentator on television is…they don’t. Even if they scream that they knew last time. And for a plan-driven, long-term investor, it really does not matter. Long-term could be 40 days for you or 40 years. Plans are created for the rest of our lives and none of us knows our expiration date.

Declines are natural and normal.  Straight lines are abnormal.  Now, of course, if you have money sitting on the sidelines and you were waiting for a better time to invest, corrections could be those times.  Or if you are soon-to-be-retired or retired, remember that we have money parked to be your income.  Money we set aside every month, so we never ever worry about taking while the market is down.  We’ve got that covered. 

Remember: Your investments are the engine to your plan, which is the vehicle driving you to all the destinations we’ve planned for your long-term retirement.  Goals – Plan – Portfolio.  Those are the things that matter.  Current events are just that, current events. 

Know we are always here to help.

1 “What it takes to be an equity investor,” ColoradoBiz, March 13, 2020.  https://www.cobizmag.com/what-it-takes-to-be-an-equity-investor/

Storms ahead? What you need to know

The stock market got a little crazy this week.

Is a storm coming?

Let’s take a look at what’s driving markets right now.

(Scroll to the end if you just want our takeaways.)

A few things are driving the market volatility:

Fears of a financial crisis in China.

China’s overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt.1

Its failure could trigger a cascade of defaults among banks, materials suppliers, and investors, potentially leading to broader financial issues in China and abroad.

Worries the Federal Reserve will start tapering soon.

The Fed meets this month and traders are uneasy about the idea that the central bank could start pulling back the support now that inflation is higher and the jobs market has improved.2 Firms that depend on low interest rates and easy credit could be hurt.

Concerns about COVID-19 case numbers.

Variants continue to pop up and the delta variant continues to keep cases and hospitalizations high. Investors are concerned that another winter resurgence (like we saw last year) could slow down business and economic activity.3

Fears of another debt ceiling showdown.

Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.

Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinksmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets.4

Do you see a trend? Markets are being driven by fear, anxiety, and doubt.

Which of these squalls will fade away and which could blow into a tempest?

We can’t know.

So, here’s the real question:

Could we see a 10%+ correction in the weeks or months ahead?

Possibly.

Corrections and pullbacks happen regularly and it wouldn’t be surprising to see a market drop.

To show you just how ordinary corrections are, here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance.

(Take a look at the red circles to see the market drops each year.)

The big takeaway? In 14 of the last 20 years, markets have dropped at least 10%.5

Even years with strong performance saw big drops.

We’re dealing with a lot of uncertainty and investors are feeling understandably cautious about what’s ahead.

But, that doesn’t mean that we should panic and rush for the exits.

Pullbacks, corrections, and even downturns don’t last forever.

Trust the process. Trust the strategy.

We’re keeping an eye on the Chinese property market situation, as well as workings over in Washington. We can’t predict which way markets will go in the coming weeks, but we’ll be in touch as needed.

Have questions? Feeling uneasy? Please reach out. That’s what we’re here for.


1https://www.cnbc.com/2021/09/17/china-developer-evergrande-debt-crisis-bond-default-and-investor-risks.html

2https://www.nbcnews.com/business/markets/dow-futures-tumble-more-600-points-september-slide-intensifies-n1279618

3https://www.cnbc.com/2021/09/19/stock-market-futures-open-to-close-news.html

4https://www.nytimes.com/2021/09/20/business/stock-market-federal-reserve.html

5https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.