Once every 18 months. That is how often the S&P 500 drops 10%, also known as a “correction”. We all remember the last correction (also commonly referred to as a “crash”), which happened in March of 2020. But what you may not remember is how long it took for the market to recover from that crash. The market took less than 5 months to rebound, bouncing back in August 2020. That was an enormously quick turnaround. August of 2020 was 18 months ago, and guess what we have not had in 18 months? That’s right, a correction!
The market is not sentient and certainly doesn’t know that it was due for a correction, but the participants in the market are sentient and also emotional. The slight majority of those participants have, for various reasons, decided the market was overvalued and have sold in recent weeks. This selling has outpaced buying and that is how a correction unfolds every time. Currently, the S&P 500 is down 8.97% as of close on 1/25.
An interesting note is that, despite the fact that the S&P has not closed more than 10% down during trading, on 1/24 it was down as much as 5%, which put it well into correction territory.
In my last market update just two short weeks ago, I explained that this year could prove to be difficult for growth stocks as the Fed tries to combat inflation. Furthermore, I expressed that this could be good for value and international stocks. We have been a bit underweight growth stocks and have a healthy exposure to both international and value stocks. The market as of recently appears to agree with that sentiment as growth stocks have taken the brunt of this correction compared to value and international. We expect that growth will continue to face more headwinds than other stock categories. The chart below illustrates the contrast between these categories during this correction period.
So, is FSG doing anything during these turbulent times? In general, our portfolios have been tilted slightly conservative as our data has suggested that the market was overvalued and presented a dislocated risk/return prospect. We are now trimming some of our conservative positions and buying value tilted stocks via ETFs and Mutual Funds. You may see these transactions via trade confirmations. Please note that the above changes are what those trade confirmations are referring to.
Your advisor can of course provide more specific information relative to the changes made in your accounts if you have questions. As your financial firm, we strive to not only do the best possible job we can for you, but also keep you informed with what our thoughts, plans, and actions are. We are an open book and encourage you to reach out if you have any questions or concerns.
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Written by Brice Carter