With the declines on 2/8/18, the stock market has officially hit “correction” territory, which is generally defined as a 10% decline from a previous high. While concerning, corrections occur once a year, on average. We haven’t seen a correction in over two years. Corrections also tend to be short and shallow. “The average bull market ‘correction’ is 13 percent over four months and takes just four months to recover,” Goldman Sachs.
From a technical perspective this week’s activity has a normal pattern during a correction. There is usually a selling climax (swift and sizeable decline), followed by a throwback rally that doesn’t hold, leading to a retest of the previous low. That is exactly how this week has played out. On Monday 2/5 the DJIA declined 1,175 points in swift and massive selling. On Tuesday 2/6, the DJIA declined another 577 points intra-day, before reversing to rally 1,124 points. Yesterday, 2/8, we saw more selling and a decline of 1,044 points, to almost exactly the intra-day low on 2/6. If the pattern holds, the market will waffle between gains and losses for a period of time in a bottoming process. As long as the recent intra-day lows (23,778 on DJIA and 2,580 on S&P500) hold I anticipate we have seen the worst of this correction.
We do not think this is the beginning of meaningful and sustained weakness for markets, as fundamentals remain supportive (economic growth and corporate profitability are improving). However, volatility is back and likely here to stay. We continue to focus on balancing the risk and return potential in your portfolio and will make any appropriate adjustments as conditions evolve.
As always, we appreciate your confidence in us. Please call us if you wish to discuss further.
Sources: Raymond James & Assoc., Goldman Sachs, CNBC.com
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