Is a Correction Finally at Hand
After snapping a four-week winning streak over Memorial Day, stocks retreated once again last week. Is the long awaited (and inevitable) market pullback finally at hand?
The largest decline over the past 12 months was from September through November when the S&P 500 fell roughly 7 percent. Since then, markets have risen another 20 percent. Even after losing 2 percent the past two weeks, the S&P 500 finished up 2.08 percent for May.
Yet naysayers and doom and gloom prognosticators abound. Don’t forget that even a broken clock is right twice a day. Common sense tells you that stocks can’t keep going up forever. May has traditionally been a slow month because many traders like to take money off the table after tax season ends. Yet we still saw gains last month.
One stat I watch very closely is the amount of money that goes into stocks each month. Before every market crash that I can remember, new money going into the markets peaked shortly before the collapse. We’ve seen more money going into stocks in 2013 since the turn of the century. That’s a warning sign which is difficult to ignore. One indisputable fact about investing is the crowd is rarely right. That is when everyone else is buying, you should be thinking about selling and vice versa.
Every market cycle is different but this one in particular has been an anomaly. Scores of investors have missed the majority of the gains we’ve seen over the past few years. These just aren’t smaller investors. Many professionals have woefully underperformed and are looking for buying opportunities.
I have been warning clients about long-term bonds all year and May was a difficult month for those folks. Conservative investors who buy CD’s are being squeezed from years of historically low interest rates. And even when the Fed slows down the amount of stimulus they inject into our economy, they will do so in a manner that does not wreck the slow recovery we’ve seen.
From 1991 through 1999, stocks rose every year including an unprecedented five-year run from 1995-1999 where the markets gained at least 21 percent every year. In fact since 1978, we have only had six losing years in the markets. That’s an average of one loser every six years.
Even with our recent gains, don’t forget that the Dow Jones has averaged less than a 2 percent annual return since 2000. Strip out dividends and that means that stocks have barely budged for nearly 14 years.
Central banks around the globe continue to pour money into their economies as they struggle to climb out of the financial crater left behind by the Great Recession. The U.S. appears to be ahead of the rest of the world in that recovery.
So are we approaching a correction? Don’t bet the farm on it. There are many forces at play that may continue to push stocks higher. It’s likely that if we see pullbacks, those declines will only bring in more buyers trying to make up for lost time. I recommend investors be courageous yet cautious. Broad based ETFs might be a better alternative than individual stocks in this environment. Happy hunting!
Kevin Powell has been a financial adviser for the past 27 years and can be reached at firstname.lastname@example.org.