Bounces are a Healthy Part of Any Correction

Today’s stock market bounce was impressive, and showed that investors are still willing to assume risk. However, just because the market bounced today does not mean that the correction is over.

Could the correction be over?

Sure, but I don’t think it is. We have not had a meaningful correction since 2011 (10% or more in the S&P 500). Valuations are extended, and the Fed is threatening to enter a rate rising cycle that will last years.

Does this correction mean the Fed is less likely to raise rates in the near-term?

Absolutely not! First of all, the Fed looks at the stock market, but doesn’t not make its major policy decisions based on short-term market fluctuations. The vast majority of economic data, including today’s durable goods orders number, has been positive and strong lately, and that data will assume a much more meaningful role in the Fed’s decision-making process. If anything, the fact that stocks have already corrected will likely take some of the pressure off of the Fed, since they will feel there is less risk of their rate increase triggering a correction.

What should investors do?

That depends on a lot of factors; some specific to the investor, and some market-based. If you are using a buy and hold strategy, and have a long expected holding period, you probably don’t care too much about short-term corrections. Unless you believe we are about to enter a bear market and a recession in the economy, you probably don’t need to change anything. If you are adding money through a 401(k), 403(b), or other investment account, each month, you can keep dollar-cost averaging as you always do. However, if you are fully invested and have a shorter time horizon, you may want to reduce risk. Each investor needs to make their own decisions based on their unique investment objectives and risk tolerance, but in general, if the market is entering a significant correction phase, it is better not to sit by and do nothing while portfolio values evaporate.

I expect further downside and will look to put cash to work as the market continues down (if I am correct). I have been waiting a very long time for more realistic prices, and we are on our way there, but have not yet arrived. If the correction is to continue, it should not take very long to play out. The remainder of the week should help us determine what to expect for stocks in the near-term.

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