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Is the recent pull back in the market a normal correction or the start of a “Bear Market”? This is a question on the minds of many investors today. Only time will tell, but from the information at hand it does seem to me like a normal correction within a bull market.
Corrections are defined as a decline of 10 percent or more without dropping more than 20 percent. If the market dropped more than 20 percent, we would technically be in a “Bear Market”. The last time we had a “Bear Market” was during the financial crisis in 2008. The market bottomed in the beginning of 2009 and we are now in the longest bull market since World War II. At some point it is going to end, but I really don’t think this is it. Earnings for the major companies that move the market are coming in strong. The US Economy is moving along at a good pace and the consumer is healthy with cash to spend. Bull markets don’t die because of old age. They die due to recessions and lack of earnings growth. We are not seeing those signs. As I write this, the earnings reports from a handful of major corporate bellwethers have come in above expectations. Earnings growth and free cash flow are what move stock prices higher long term. Fear and Greed are what move stock prices short term.
The current market declines are being driven by fear and not by fundamentals. Fundamentals are solid, and they should continue to be going forward. As investors, we should step back and really look at our portfolios and assess the current asset allocation. Stocks and bonds have both pulled back recently so there hasn’t been many places to hide from the declines we have seen recently. I do believe that opportunities for reallocating assets are present and should be used to your advantage so that when the markets do rebound your portfolio benefits. Do not make irrational investment decisions during market declines. Be smart and have a strategy to invest in companies with solid earnings growth. Now is not the time to speculate and increase risk. There are many great companies with solid earnings that are trading more than 15 percent off their highs. Now is the time to buy the companies you wanted to own but thought they were too expensive a month ago.
The S&P 500 is down just over 8 percent as I type. We could easily drop another 5 percent or more before this current correction is complete. It is almost impossible to pick the bottom, but I encourage you to look out longer term and understand that you don’t have to pick the bottom for your portfolio to benefit months from now and years from now. The current situation is painful because markets go down faster than they go up, but this is a time to be improving your portfolio, not running for cover. Investing takes patience and discipline. Don’t let the fearmongers drive you to make poor investment decisions.