Market Health

Are We on Track for a Market Correction?

Is time running out?

That’s the nagging question on every investor’s mind.

When times are good, it’s human nature to start fretting about when the other shoe is going to drop.

And right now, with each passing day, the fear that something tragic is about to unfold grows ever larger.

But how concerned should you be really?

53 and Counting

Forget the jobs numbers, retail sales and the possibility of a Federal Reserve rate hike.

Two numbers are garnering a lot of attention right now… 53 and 209.

The first is the number of new all-time highs the S&P 500 Index has set in 2021. The most recent high was hit yesterday.

It’s almost hard to imagine that the markets were suffering through their fastest 30% decline on record just a year and a half ago.

But since hitting that closing low of 2,237.4 on March 23, 2020, the S&P 500 has rallied more than 100%, setting dozens of all-time highs along the way.

That’s a positive.

Despite all the tragedies of the pandemic, the starts and stops of the economic reopening, and the natural disasters, the markets have remained resilient. Investors have remained optimistic and bullish.

And at this pace, the S&P 500 is poised to set a total of 78 new all-time highs this year. That in itself would be a record, topping the current crown of 77 new highs, which was set in 1995.

Now, the other number is a little more troubling…

209 and Counting Down

From the close on October 12, 2020, to the close on October 30, 2020, the S&P 500 fell 7.5%.

1-Year Performance S&P 500

There was a lot of tension heading into the 2020 U.S. presidential election. That was nothing new for election years. It even has a name: the “October Effect.”

But as I pointed out last fall, the markets would rally regardless of who won.

Investors cheer clarity and despise uncertainty.

The index has shot up nearly 39% since that low on October 30. And the bull market born in March 2020 continues to climb higher.

Now, there have been some minor stumbles along the way. Many of them have been related to either uncertainty over the impact of the COVID-19 delta variant or the Fed tapering asset purchases.

But we haven’t seen a pullback of more than 5% since the end of October.

And this is what has some investors nervously chewing on their bottom lips.

That’s 209 trading sessions without a 5% or more correction.

That means we’ve entered into a rare situation that’s happened only seven other times.

Sessions Without 5% Correction

At the moment, we’re enjoying the eighth-longest streak of sessions without a pullback of 5% or more. With each session that hits new highs or doesn’t decline over a span of weeks, we inch further up the ranks.

So the question now is this: Should we tread carefully or go all-in?

How Much History Can You Take?

As the saying goes, “May you live in interesting times.”

Well, we’ve certainly got that in spades.

Ignoring the global history that’s been made over the past 18 months, investors have seen the fastest 30% decline in market history and the fastest bear-to-bull-market recovery. We’re also on pace for the most all-time highs set in a year, and we’re currently in one of the longest streaks of sessions without a correction of 5% or more.

And that’s merely scratching the surface because that doesn’t include everything that has happened with gold, crude oil, Bitcoin, real estate and all the records set elsewhere.

Now, last week, my colleague Senior Managing Editor Rebecca Barshop pointed out the seasonal trend that the markets often succumb to in September, prior to one of the best stretches of the year.

Pullbacks and corrections are not only expected but also part of a healthy market. When euphoria is king, the madness of crowds ultimately ends in disaster. Though we’re not there yet, it’s worth keeping in mind.

But don’t fear a pullback if one does unfold.

Because, in the markets, nothing is guaranteed. And volatility is actually our ally, not our enemy.

And as we can see from the bull runs of the 1990s in the chart above, those brief pullbacks can be windows to much larger gains.

Here’s to high returns,

Matthew

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