Monday’s trading left the S&P 500 down a big chunk, and closing in on another stock market correction for the year.
As we’ve talked about before, the stock market this year is very volatile moving up and down in big moves as investors, and their computer programs, make trades based upon how they think the economy will play out among the coronavirus issue. The most recent trend has been down.
A Stock Market Correction
The definition of a stock market correction is a decline of 10%. The catch these days is that the stock market peaks are often the result of a fast runup in the markets. As a result, the first three or four percent of any correction is nothing more than taking the top off of a potentially unwarranted wave that rose too fast.
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So, here in we are in September facing down another correction for the market during 2019. As I write this, the stock market isn’t quite down enough to count as a recession, but it may very well get there later today, or even tomorrow. It is also possible the computer algorithms get tripped and start buying.
Either way, the markets are down over 9% since the last peak which was just a few weeks ago on September 2.
The point in 2020 isn’t when there is a correction, recession, or bull market as each term is defined. What investors really care about is understanding that ongoing, large waves of volatility are the norm for 2020.
So, why does the financial press keep running big font headlines about corrections and recessions?
Because it makes for good copy. Readers, both investors, and those who don’t have a penny in the markets love reading articles with those scare words in them.
September Stock Market
Just for extra fun, September traditionally is not a great month for stocks. The Dow averages something like a negative one-percent return for September. The average for all other months is positive. Of course, historical calendar trends pale in comparison to all of the news, politics, and medical data arriving each day.
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In fact, numerous parts of the economy are bucking their historical trends precisely because the covid virus is breaking them.
Rock bottom mortgage rates should create a housing boom, but people laid off in the summer don’t run out to buy houses, no matter how low interest rates are. Couple that with it being more difficult to conduct showings with virus related issues, and that people’s minds just aren’t on getting a new place to live when they are trying to shelter in place where they are.
High unemployment rates should be crushing the markets, but investors know those rates are artificially high thanks to Covid. When, and if, there is is an employment snapback that would be great news for the economy and markets.
And so on.
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So, as always long-term investors should not react to market news. A well-diversified portfolio is doing exactly what it should in these kinds of market conditions, smoothing out ups and downs, while allowing for the rewards your risk tolerance allows.
And, dollar cost averaging couldn’t work better than when market volatility creates bizarre highs and lows.
Follow the news, but do it as a spectator. Do not participate.
As always, this article is for informational purposes and does not constitute a recommendation to buy or sell. For advice specific to your situation please contact your financial professionals. As of publication, the author did not own any stocks mentioned in this article, although that could change at any time.