Here’s the correction we’ve been waiting for - February 14, 2018

Here’s the correction we’ve been waiting for

A serious stock market correction occurred last week, which took some by surprise. This fall by around 7% is even more surprising after a long period of bull market in which Dow Jones and S&P 500 broke several of their own records. But this fall is the one we’ve been expecting for months now and we among others have said that it would come in the first quarter of this year.

At the beginning of February, a serious market correction occurred in the American stock market which took many by surprise. In the last days, Dow Jones Industrial Average and S&P 500 fell by around 7%, which was a huge change after more than 8 years of bull market. But this fall was not unexpected to many analysts and investors.

Why did we expect this?

At the beginning of 2017, many waited for a market correction but that didn’t occur. Last year was the 8th year of a bull market but more analysts have been expecting a serious market correction. Interest rates were still too low; therefore, money flowed into stocks (and other instruments). But some became too optimistic. When we published our expectations for 2018 at the end of last year, we wrote: “a correction up to 10% may happen in the first or second quarter of 2018.”

CBOE Volatility Index and S&P500 prices

There were many reasons behind this, but one was even more obvious than others: when CBOE Volatility Index goes as low as in the chart above, corrections usually occur. As it can be seen, last year’s volatility hit all-time lows. This optimism didn’t go away this year instantly. 2018 started with stock markets breaking records, S&P500 for example went for its longest ever period without a fall bigger than 5%. A correction was more and more inevitable.

Not everybody is surprised

It’s not only us who believe this correction was necessary. MarketWatch, for example, published an article claiming that markets work normally now, we just forgot what normal is. They wrote: “some say investors are simply receiving shock treatment from a return back to ‘normal’ after years of easy monetary policy and sloshing liquidity changed how assets moved, and distorted the way investors went about filling their portfolios.”

Mark Grant chief global strategist for B. Riley FBR Inc. went even further, saying: Last year was really an aberration and not a normal year.This is in line with what we believe have happened. The FED is also expected to hike rates this year again and that may bring further changes to the markets. MarketWatch believes that European and Japanese central banks will follow the lead of their American counterpart.

What should we do?

It’s important to remember that the task of a good investor is not changing as the markets move, but to anticipate these movements. A correction may be necessary but losing money on one is not. This is also a reason why we always write about our expectations, even if these expectations are about corrections and not only about good news.

It’s also true that these situations may hold profit for investors. Bonds, for example, may go up in the near future as stocks go down, as this is often the case. Being cautious when everybody is overoptimistic is also a good idea, just as much as seeing opportunities when prices are low. A broadly diversified, global portfolio can also be prepared to withstand the stresses of a correction like this. It’s also important to have a clear target about a long-term investment and not to give in to speculative and contradicting expectations about the future.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.