After an up January, the long-awaited stock market correction happened in February.
From the recent peak on January 26th to the low on February 8th, the S&P500 fell 10%. Finally a 10% correction! The previous 10% market correction began in November 2015 and ended in February 2016. Many have said we were long overdue.
Of course, we are not finished with the correcting process. That will not happen until if or when we post a new market high.
My belief is that this phase of the market is not the beginning of a prolonged bear market. We will make a new high. The rationale for this is that there are no immediate signs of a recession.
This is to say that employment remains robust, consumer confidence is high, credit seems to be available and corporate profits still are rising.
What is important to note about the February 2018 correction is the speed at which the market fell. The 10% decline we experienced this year took just 13 days to happen. In comparison, the November 2015-February 2016 drop occurred over the span of 100 days.
Computer trading/algorithmic trading happen fast
The speed of the decline and the substantial swings within the decline is un-nerving and something that investors will need to get used to.
Computer trading / algorithmic trading represents a large proportion of daily market activity. Some estimate that these strategies can comprise over half of the volume on a given trading day – all this without much human intervention. These systems react to subtle market moves or discrete pieces of information and the sheer size of their trading power can move prices significantly.
Amplifying the results of computerized trading is the proliferation of indexing where so much money is concentrated in the same set of stocks. You just need to move these market-weighted names and the overall market can move a lot.
Corrections represent opportunities for patient, nimble investors
I’m afraid that February’s fast decline is a taste of things to come where corrections will be quick and relatively large. This is not particularly good for promoting market confidence but it should provide opportunities for patient, nimble investors.
If one buys stocks that have good fundamentals and that sell at reasonable prices, these deep drops represent price “sales” and bargains for the taking.
Conversely, it may mean that price surges represent chances to sell stocks as they are likely to move to investors’ target valuations faster than in the past.
It’s not necessarily that computers and index funds are the cause of volatility. Many macro-economic trends may be in the process of changing direction. Investors are struggling to find a path for dealing with a new backdrop for the markets.
Central Banks are reducing their level of market intervention.
Also, inflation, long absent, is showing some upward movement.
If these developments continue, markets will have to adapt to a new interest rate structure. That, in turn, may have consequences for P/E ratios and stock prices.
— Ian Green, Pendragon Capital Management
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.