When It’s Time For A Correction

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

When it’s time for a correction, any plausible excuse will do. It’s not unlike coming up with a reason to leave a large party. And since equity markets have been celebrating a healthy U.S. economy for the past several months, there’s no time like the present. There are any number of plausible excuses. The first that comes to mind are the impeachment proceedings in Washington, but like a Hallmark movie, that ending is quite predictable. Next we can consider the coronavirus, but a quick search of past global viral panics shows how thin that plot is. The fact is, equity markets have not had a good correction since September. When it’s time it’s time.

The S&P 500 Index had advanced by more than +17% since that September correction low. That’s a fast pace for just four months. After breaking out of its +10% trading range, the S&P 500 Index had moved an additional +10%, which is fairly typical. Both of these occurrences would satisfy institutional investors and give them ample reason to ‘reshuffle the deck.’ Remember, corrections are part of long-term investing. They can be healthy and constructive. The only ones who bemoan corrections, particularly sharp corrections, are short-term traders. While I, on the other hand, say let’s get it over with and get back to the party.

Today’s market decline has been fairly uniform with declines of 1-2%. Emerging markets and anything energy-related are seeing larger declines. The drops in emerging markets indexes are being directly attributed to negative factors associated with the coronavirus. The drops in energy are a bit more convoluted, but still being linked back to the coronavirus. The sequence is, this is the time of year when thousands of Chinese normally travel abroad. The coronavirus scare may significantly reduce their travel, which could impact the airlines, which could reduce the amount of jet fuel consumed, which could impact the current surplus of oil worldwide. Or, it might just be that there currently is an abundance of oil. Any plausible excuse will do.

One of the ‘Tells’ during an equity market correction are the U.S. Government Bond Market Indexes. This bond market sector is the most liquid bond sector in the world. ‘Liquid’ refers to how easily institutional investors can enter and exit this market, or how easily they can buy and sell. There are trillions of dollars of U.S. Government Bonds, available in all maturities, backed by the government with the strongest economy in the world and accompanied by the strongest currency in the world. When you want to ‘park’ money for a short while, say, money from proceeds of equities sold during a correction, what better place?

U.S. Government Bond Indexes are higher across the board today. They have been contained by a trading range, along with the rest of the major bond market indexes, since last August. Their moves higher today ‘tell’ us that today’s equity proceeds are being kept close and liquid, ready to be reinvested when the time is right. On the other hand, if equity market proceeds were being rotated into less liquid investment it may be concluded that institutional investors were not as concerned with liquidity as they are with safety. Of course, the situation could, and will, change over time and that’s why it’s so important to stay tuned to coming attractions.

As always, the big picture is the best picture. Most certainly, one day does not a market make. And most certainly, too much analysis of a single day’s activity has been known to upset if not derail a perfectly fine long-term investment strategy. It can even happen to professional investors! This month’s commentary was simply intended to discuss how market corrections are like rain. Too little or too much can be problematic, but it’s necessary to keep things growing. So we measure it, talk about it, and complain about it when necessary.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.