What Is a Rolling Correction, And Are We in One?
Since July 9, the S&P 500 is only up 2 percent, and the market is muted at best. The term “correction” to most investors has to do with the stock market or its wildly popular indexes having a downturn of 10 percent or higher. This can be days long or months long historically. This can be triggered by anything such as a Federal Reserve action, a war or unexpected bad news. At the moment, no such news headlines exist that are big enough to cause this standard correction, though there is some anticipation on if the Federal Reserve tapers and what that will look like going forward.
The markets shot up initially during this 17-month bull market, since COVID put us into an ultra-bad correction/recession/black swan event. However, over the last few months, the markets have now become rational, as nothing has caused a run-of-the-mill correction and the market also has not been going straight up. This is a stock picker’s market in my opinion. Quality stocks in well-positioned sectors will have much higher upside potential than the overall market indexes. However, what about a “rolling correction”?
A rolling correction, by definition, is when markets stay relatively flat while earnings are phenomenal, allowing price-to-earnings multiples to decline, in turn for stocks to be lower priced and their value more aligned to historic multiples. This also happens when stock prices go down, but not all at once like a standard correction. An example of this is that the S&P 500 has had 90 percent of its 505 companies in the index experience a 10 percent or more drop in their price in 2021 alone. Many would never have guessed or thought that, given the market’s huge yearly rise. Since some stocks dropped while others went up, the overall market hasn’t felt the brunt of a drop of 10 percent or more. This has happened, in part, by investors loading up on value stocks and then selling them for growth stocks throughout the year. So, the pain of a standard correction has been lost.
Now, the question is where do we go next? Well, right now, there is over $5 trillion sitting in cash money market accounts, which historically is high waiting for investment. Correction or not, I still think stocks is where you want to be long term and the value is still there. Interest rates are at zero, and the Fed with its tapering plans or not should move slow if and when they actually raise rates. Historically, cash eventually will go to work causing these well positioned stocks to go up long term. If we can hedge the risk using structured investments on top, we will be well-positioned to perform. As I always advise to stay prudent, stay diversified invest with a plan and block out the noise of the “experts.”