This weekend, I mostly finished building a big deck in our back yard, but while I was tediously screwing down plank after plank after plank after plank, I thought about the market. I wondered if the rally on Friday would have any legs come today. I suspected it might as the news from Ukraine and Gaza over the weekend tempered. So far this morning, my suspicion seems correct. The buyers are seeing this sold-off market as a buy. But alas, the day is young.
While I was screwing down plank after plank after plank after plank I thought about the last mini-correction we saw in January. So, this morning, I looked up what happened all the way back then and compared it to now. The 3.9% correction in the S&P since July 24th is less than the 5.8% correction we saw in January. Thus, I suspect there is still some bearish energy left in the tank.
It also occurred to me (lots of time to think when screwing down planks) that what is happening in the market now (despite the breathless media’s desperate treatment of what is happening in the market now) is normal market behavior. Rebalancing is the word I use in this column over and over again. How many times have we seen this mini-correction in the last five years?
We have seen it so many times the hilltop screamers and the perma bears (celebrity analysts) are now reduced to telling us these mini-corrections mean nothing, that only the 10% or more correction is meaningful to this market. The argument is the last correction we saw of that caliber was the debt-default correction in the summer of 2011 (19%), so it is coming because the market has a history and extrapolated stats to go along with that history.
- S&P 500 corrections of 10% or more, including those that turned into bear markets, occur nearly every 1.5 years (357 trading days) on average since 1957. The last correction began in the summer of 2011.
That brings the total number of days without a major correction to over a thousand days, which makes it quite a stretch.
- The 1,000-day milestone (reached in June), marks the fifth-longest stretch without a correction since 1928, according to Bespoke Investment Group. It’s the longest pain-free rally since a 1,127-day run without a 10% drop from July 1984 to August 1987.
My contention is so what? Today’s market is not the market of 1928 or 1987. It might just be the market has evolved into something different, a market that can survive quite well on mini corrections. As long as geopolitics don’t get out of hand, the banking system remains intact, economies keep moving forward, and earnings remain solid within reasonable P/E ratios, the market might just keep rebalancing with 3-5 percent mini corrections from time-to-time.
And the catalysts for the rebalancing are always out there. Just look around.
- While the action in Ukraine is getting most of the attention these days, there are also worries about the state of the banking system in Portugal and the potential for contagion, the debt default in Argentina, the state of the economy in the Eurozone, the potential for the Fed to hike rates sooner than expected, the valuation levels in some areas of the market as well as the many and varied purported bubbles that may be forming at the present time.
Now add to the above the reality that the junk-bond market has become somewhat overheated and is now experiencing a rebalancing of its own.
- Investors pulled a record $7.1 billion from U.S.-based junk bond funds in the latest week and bailed out of equity exchange-traded funds at the most frantic pace in six months.
As well, the latest mini-correction has institutional investors on the run, even as they put in a lot of money the week before.
- Stock funds, whose flows tend to move in tandem with those of high-yield bond funds, posted $16.4 billion in outflows, the most since February.
My guess is we will see the in and out of institutional money be somewhat volatile until the market settles down about this latest mini-correction. If the earnings continue to come in solid, the P/E ratios become more reasonable, and the US economy keeps signaling it is getting stronger to the tune of 3% or more, then the market will settle down and the host of negative catalysts mentioned above will have much less power to move the market.
Even with the junk-bond market “bubble” popping a bit, it might be the evolved market might not care. It might be that fundamentals ultimately are the key to avoiding or experiencing a correction of 10% or more. Yeh, it just might be.
Trade in the day; invest in your life …
