A Correction Is Coming!

Warning, a stock market correction is coming. The political environment, lack of a financial stimulus package, the pandemic, corporate bankruptcies, civil unrest, and so on will be too much for the market to bear. To prove my point, let’s examine a few previous market cycles.

March 9, 2009, to October 16, 2020

The S&P 500 soared 415% from March 9, 2009, to October 16, 2020. The historic climb started after the market plunged more than 50% during the Great Recession. If you invested $100,000 at the beginning of this bull market, your account would be worth $515,000.

Despite the bull market’s stellar performance, the S&P 500 fell 34% in March 2020. It lost more than 10% nine times and dropped more than 5% on thirteen separate occasions. The average decline during this bull market was 2.71%.

January 1, 1991, to April 1, 2000

The S&P 500 climbed 353% during this bull market, including the late nineties’ melt-up in internet stocks from 1995 to 1999. This market was the first time where investors could trade online, and firms like Schwab, T.D. Ameritrade and E*Trade rose to prominence. A $100,000 investment at the beginning of this bull market grew to $453,800 on April 1, 2000.

However, the late nineties bull market experienced many significant drops, including a 20% drop in 1998 and more than a dozen declines of 5% or more. The average decline during this bull market was 1.89%.

January 1, 1982, to September 1, 1987

The S&P 500 rose 163% during the great ’80s bull market. After a dormant 1970s, the market increased significantly, fueled by declining interest rates. A $100,000 investment grew to $263,900.

Like previous bull markets, this one experienced several severe corrections. In 1982, the market fell more than 16%, and in 1984 it dropped 14%. The average decline for this five-year run was 3.97%.

October 16, 1987 – October 16, 2020

The crash of 1987 occurred 33 years ago today. If you invested $100,000 on the Friday before Black Monday, your account would be worth $1.23 million today, producing an average annual return of 7.9%. In addition to Black Monday, where the index fell 23%, your portfolio also endured the Tech Wreck of 2000, where stocks sank 43%, the Great Recession when stocks dropped 56%, and the recent pandemic where the index tumbled more than 30%.

A correction is coming, but I don’t know when. It could happen tomorrow, next week, next year, or next decade. I don’t know, nor does anyone else. And, people who claim they can predict market moves are full of rubbish.  During every bull market, there are sizeable corrections. If you liquidate your holdings during a crisis, you will miss exceptional gains when stocks recover. If you panic, you lose.

Investors can also lose money while waiting for a stock market correction. If you sold your investments in May expecting a summer pullback, you missed a 16.5% return. Since the market low on March 23, 2020, the S&P 500 is up 56%, and year-to-date it’s up 7.41%.

To be a successful investor, think long term, invest often, buy the dips, and follow your plan.

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” ~ Peter Lynch

October 19, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Source = YCharts