Correction time?

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In last week’s hot topic Tuesday, I wrote about how the market appeared to be red hot and, based on the historical data and valuations, may have been a bit overdue for a correction. Now a week later we may be seeing signs of bearishness that could be signaling details for a potential correction.

In late October the market saw a quick 10% correction and from there like a rocket spurred a 25% rip to end out the year and has carried out for the beginning of this year. This run up coming to the tale of a bullish Santa clause rally, solid earnings across the board of the S&P 500, and the early outlook that the FED would be cutting rates anywhere form 5-7 times in 2024. However, like the old saying goes, what goes up must come down… but the real question to be drawn is – How soon and how much?

Also, is not the market ready for a little break?

Ben Carlson covered in a recent work on his website, A Wealth of Common Sense, what it would look like if we examined some of the larger downturns and corrections the market has faced since 1928. Ben highlights several double-digit corrections that never reached bear market level which he considers to be 20% or greater drawdown of the market.

Figure 1: S&P 500 Corrections Since 1928 (Chart produced by A Wealth of Common Sense via Author Ben Carlson)

Based on his findings, over the last almost 100 years the average correction was only a mere 13.8%, with an average duration of 116 days from peak to trough. Now while these corrections are taking place, they almost always will feel like the sky is falling and that the market is sliding…. But really it is okay to have downtrends in long-term uprising market. Especially during this election year (2024) and while consumer demand and unemployment is so strong.  [1]

When you think of the S&P 500 since the early 90s most think of the tremendous bull market with several years marking double digit returns above 20%! However, no one ever realizes that during all this up trend there was also numerous periods of correction lasting on average greater than 20 days and greater than 20%. [1] Just to play around a little if we here to see the market correct 10%, or greater, the S&P would retreat to levels well below 5000 to around 4600. Now does that sound so bad?

To stress my point even further, the S&P is up almost 70% since the beginning of the 2020s even though we have witnessed two bear markets, a pandemic, and a period of some of the most political divergence ever seen. [1]

I am not saying we are heading for a correction, neither am I saying we are about to enter a bull market. At the end of the day no one knows exactly but it is important to be well prepared to stomach a pullback in the market. It is also important to acknowledge that a correction right now might be a good thing and be a healthy cycle for the market.

Disclaimer: All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This is a hypothetical scenario for educational purposes only and should not be considered financial advice. Please consult a qualified financial advisor before making any investment decisions. This blog post is for informational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any investment decisions.

You can read more of my last work here:

1: A Wealth of Common Sense:

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