The long wait for an uptick in volatility came to a close this week with the major U.S. stock market benchmarks entering the first technical correction since early 2016. Most investors we’ve talked to this week have had one fundamental concern around the recent market activity - “Is this a signal of a larger downtrend?” We don’t believe so.
A market correction is defined as a 10% drop in price and in the vast majority of historical instances are a sign that the capital markets are healthy and functioning. They can indicate overall profit-taking and are not a reliable indicator of a Bear Market. Bear markets, which are longer-term periods of falling stock prices and general market pessimism, usually coincide with economic recessions where we would generally see two back-to-back quarters of negative GDP growth.
To draw an analogy, if you view a complete market cycle as a marathon race then a market correction is similar to stopping for a water break and taking a breather, and a recession would be dropping out of the race altogether. What we saw over the last two years through this week could be compared to a marathon runner sprinting the middle to later stages of the race, and then reassessing their strategy and tempo as they turn a corner and see the “10 miles to go” sign.
According to the underlying economic fundamentals and corporate earnings data, we’ve still got some metaphorical miles left to go in this investment marathon. For additional detail on the current investment and economic landscape, please click here to read the article written by Brian Wesbury, Chief Economist, and Robert Stein, CFA of First Trust.
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