Corrections Unsettling, Not Unusual

By Andy Pulsfort

The last month has brought an increase in volatility to stock markets and investment accounts. As global and domestic issues work out, it is important to keep a clear head and take a focused approach. The S&P 500 was up 80% from its low before the recent tumble. A correction in equities was overdue and we are experiencing that now.

One important fact is that global financial markets are in much better condition now than they were a year ago, so we did enter this recent uncertainity on much better footing.

We are 14 months into the current bull market, which is close to the average time for the first correction (17 months). It is usually found that markets begin to correct after a 60% recovery. In 2009 and early 2010 we blew past that threshold by a third again as much. This welcome, but unsustainable return suggested that any correction would be swift and perhaps a bit more significant than others.

What defines a correction? Most financial gurus consider a decline of 10% or greater as putting the market into correction mode. So far we are a bit over -12%. This can be expected from the greater than average run up in value. The success of the market recovery also caused the one clear area where this market correction differs. in that generally it takes 54 days to reach the -10% mark, and in this case it took only 27.

While no one has enjoyed seeing their earnings relinquished, it is important to remember that the activity we are seeing now is normal. Stock markets progress better when operating efficiently, which means investors making choices based on sound financial knowledge. Since 1928, 70% of the years have experienced a correction at some point.

While its important not to ignore what is occuring around the globe, it is also important to continue taking prudent approaches to investing. Many will even argue it is time to buy.