There have been 7 corrections/crashes in the global markets just since 2009. There have been 17 in the time I have been working as a financial planner (according to Wikipedia) One of my favourite lines from this article says that this most recent February 2018 correction has “wiped out over 2 months of gains.” Two Months! …sheesh

Trigger Warning

There was volatility – i.e. markets dropping fast, since no one cares about UP volatility – reported globally. There’s been a wide variety of commentary and opinion about what triggered this correction. A partial list includes:

  • strong wage growth in the US
  • US tax reform
  • continued quantitative easing
  • worries about a US government shutdown/debt levels/deficit
  • global economic growth (?)
  • Increasing trade barriers, worries about NAFTA
  • rising interest rates
  • high stock market valuations
  • automated trades
  • etc.

The likely truth is all of these factors currently exist and likely all of them to a greater or lesser extent contributed to the volatility seen in the first half of February. Ironically, you will remember some of these factors were also being listed a few weeks ago as reasons for the stock market to continue to grow.

Looking for Better Value

Most of the money managers, analysts and economists I’ve heard from believe this to be only a stock market price correction. The fact that many parts of the world are seeing economic growth, wage increases etc. is held up as a reason for the lack of true concern. However, the economic cycle is still turning and no one economy nor global economy can continue to grow without interruption. At some point there will be a recession. The depth of this recession, how long it will last, who will be most affected, etc. is not known. What is known is that

  1. It will happen.
  2. It is not the end of the world.
  3. It is not even the end of economic activity. It is simply a recession.

Many of the management teams we use have been growing more and more nervous about the price the stock market was demanding for many of the businesses they invest in. This meant that over this last year or more, many of the managers have underperformed their relevant index because they have been hesitant to invest at what they believe to be unreasonable prices for the underlying businesses. The annoying thing about this correction over the last two weeks for many of these managers is that it was not dramatic enough. Namely, if they thought stocks were overvalued last fall or last December then this big headline-grabbing, panic-inducing volatility has done nothing for them. In the end, stock market indices have only fallen a few percentage points after strong growth. This is particularly true in the US and other international markets.

This means that many of the value focused managers have not actually made a lot of new investments during this correction. This may seem like a warning because it is effectively saying there is more volatility ahead. However, the various money managers are only saying they want the stocks to be better value. Stocks become better value in one of two ways. Either the price that it’s sold for drops IE market correction or the underlying business grows. The professional money managers are not predicting either of these conditions they are just waiting for it to happen.

What it Means for You

 For your own portfolio, what I have learned over the past 17 corrections is that every one of them, in fact EVERY CORRECTION/CRASH IN HISTORY, has ended up being a good time to invest. So, let’s all perversely hope we get a real correction and not just this paper bear.

 More Reading

Here are links to some of the information I have reviewed and would recommend.

Good News is Bad News

A Correction in Perspective QV

What’s behind The Market Pullback? Fidelity Canada

The Return of Volatilty CI Signature

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