The Long-awaited 10% Correction

It looks like a good time to be a buyer of equities. They certainly have been on sale in recent weeks. The third quarter was a rough quarter for stocks. The S&P 500 dropped 6.9%, European Stocks fell 8.8%, and China plunged 28.6%, while Emerging Markets as a whole sank 18.5%. Even Japan, a recent safe haven, lost 14.1%. Commodities also finished lower, though we believe oil may have bottomed for this cycle.

Bonds fared better, actually earning a positive return. The Barclay’s U.S. Aggregate Bond Index closed up 1.3% for the quarter.

We finally got the long-awaited 10% correction. Historically, for U.S. markets, 10% corrections have occurred every eighteen months or so on average. This time we went four years before experiencing a downturn of that magnitude. We believe the Federal Reserve’s Quantitative Easing (QE) helped delay this process.

It appears that a market reversal occurred on Friday, October 2.  And while we feel there will be continued volatility, we nevertheless believe this correction phase may be over for the most part. A majority of corporate earnings are due to be released before November, and other than unknowable geopolitical events, we believe earnings will have the greatest impact on fourth quarter performance.

Some domestic economic weakness should be expected due to foreign weakness. One example of this would be Canada. It is in recession due to the fact that Canada is a major natural resource exporter of oil, gas, coal, iron ore, copper, etc.; all these commodities are out of favor (natural resource mutual funds fell 21% on average last quarter).

Historically, the fourth quarter is quite good. Since 1990, the S&P has gained an average annual return of 5% during the last 90 days of the year. December has historically been the best month of the year for market performance.  We are guardedly optimistic that this historical trend will once again help move the market higher.

 

 

2 thoughts on “The Long-awaited 10% Correction