If you have 24 hours to fill on your financial news network, you can only run Shark Tank reruns for a certain amount of time before people expect actual news programming. So what do you do on a news program when there’s no news? Invite an “expert” to talk about the impending 10% correction in the stock market. Using a specific number like 10% adds an air of certainty to the claim. Calling it a correction makes it feel like the current level of the stock market is wrong, throwing light on the “expert” as the person who is right.Saying the correction will happen soon is a reminder of what an incredible hot streak the market has been on and this time of year is perfect to slip in “Sell in May and go away” regardless of whether that saying has any basis in reality or not.
We’ve actually had plenty of 10% corrections over the last few years. Why don’t they count?
Since August 5th, 2011 until the end of April 2015, the S&P 500 (including dividends) has not had a single 10% correction. On the other hand, only two out of the ten S&P 500 sectors can say the same thing. Energy (4 10+% corrections), Materials (4), Financials (3), Industrials (3), Telecom (3), Information Technology (2), and Utilities (2) all had multiple 10+% corrections during that time. Consumer Discretionary only had one such drawdown. Energy and Utilities still haven’t recovered off of their most recent lows. Health Care and Consumer Staples have only had drawdowns of about 7.5%.
Is a 10% drop in the stock market out of the ordinary? On its face, a call for a 10% correction may sound bold, but in the context of the history of the stock market it is a coward’s prediction. On average, the market has a dip of 14% EACH YEAR. The S&P 500 still managed to average a 10.65% return annually over the last 45 years despite the dips, corrections, and bears.
This is not to say that the market is going to go up forever. It won’t. My point is that timing the market based on some arbitrary number scheme (it hasn’t gone down by x% for y amount of time) is foolish. How crazy is it that someone would be more bullish on the market if only it wouldn’t go up so much? It’s like the Yogi Berra quote about a restaurant, “Nobody goes there anymore. It’s too crowded.” The human brain is wired to focus and act upon bad news. Recognizing the 10% Correctionistas as time fillers rather than trusted experts should help put their message in perspective.