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Market Flirts with Correction Territory


Yesterday’s market drop was certainly disconcerting for most of us, but it is unfortunate that we did not see a more enlightening end-of day headline along the lines of "Dow drop is 99th largest on record."Monday’s drop of 1,175 points on the Dow was the largest absolute point drop in history, with the index falling from a near all-time high of 25,521 to 24,346 at the end of the day, a percentage drop of 4.6%.  For comparison purposes, the front page of today's Wall Street Journal has a nice chart showing the 10 largest percentage drops on the Dow in history, from the 22.6% drop on October 19, 1987 at #1 to the 7.8% drop on July 21, 1933 at #10.Monday’s 4.6% drop ranks 99th, a bit less chilling when measured on a relative rather than an absolute basis. 

The most common definition of a market correction is a decline of 10% or more from a previous peak.  Both the Dow and the S&P 500 Index peaked on January 26, 2017.  As of the market close yesterday, the S&P is down 7.8% from that high and the Dow is down 8.5%.  Both declines are less what is needed to call for a correction, but of course a correction is still possible at some future point.  Today the market rebounded with the Dow closing up 567 points at 24,913 – the biggest one-day percentage gain (+ 2.33%) since November 2016 and the S&P closing up 46.23 at 2,695, a gain of 1.75%.  Regardless of market swings, however, whether or not we enter correction territory should not change our long-term investment strategy.

In some ways, Monday’s market action could have been a reflection of strength in the economy – increasing growth and low unemployment yields fears of inflation and rising interest rates, depressing stock prices.  In any event, neither we nor anyone else can predict the day-to-day swings in the stock market and all of the available data show that market timing remains a loser’s game, so our advice to our friends and clients has not changed:  keep your eyes on your long-term objectives and hold a diversified portfolio that is appropriate for your risk tolerance.  That was our advice to clients when the Dow hit 6,700 in 2009 and it is the same now that the Dow is bouncing around in the 24,000 to 26,000 range.

During this period of uncertainty we need to be mindful that radical shifts in our investments are rarely wise during periods of volatility.  We certainly understand how the volatility that we have seen over the past few days can cause any of us to be somewhat nervous, and the hype of the press certainly doesn’t help us focus on what we should be doing – focusing on the long term and whether or not our portfolios are structured to meet our long-term goals.