The age old question of when we will see the next market correction continues to be pondered. Meanwhile, the market continues to rise on strong corporate earnings growth and a worldwide economy viewed as improving. Corrections are a normal process within any bull market. The corrective backing and filling process is healthy and actually builds a better foundation for the next leg up. Since the market bottom on March 9, 2009, there have been twelve corrections of 5-10 percent and 4 drawdowns of 10-20%. The market recovered quickly from each of these corrections and there seems to remain an underlying bid. Buying the dips has been proven a successful strategy for now.
So when is the next correction coming? We have had over 243 trading days without even a 3% drawdown which is a new record for the market. Last week for the first time in twenty years, the S&P 500 closed at a new record high all five days. Bull markets often continue to surprise to the upside. Thus the clichés “don’t fight the tape” or, “the trend is your friend.” Another interesting statistic; The S&P 500 was up, on a total return basis, each of the first 9 months of 2017. This was last achieved in 1995. With a few days left in October, the odds are favoring 10 for 10. We will not try to time, trade or avoid a correction. As long as the big picture fundamentals do not change, any looming correction should be viewed as an opportunity rather than a reason for concern.
In fact, we would argue that the risk of a market melt up could be more of an issue. There are a couple of situations that could simply push the market ahead of itself. One , there are times when skeptical investors just throw in the towel and buy the market adding, short term, a significant amount of liquidity. Two, expectations are very low that any meaningful legislation gets through Congress. A successful vote on tax reform for example, could propel the market too quickly. Markets do not make big moves based on expectations but, on any significant variance from expectations. A market melt up could add volatility as the “where we go from here” becomes cloudy and harder to predict.
The belief that the market rally has been too narrow has been quickly dismissed recently. Some believe the market has been driven by too few sectors or individual names however, the small cap Russell 2000 Index rallied in the 3rd quarter from flat lined for the year around August 21st to up 11.48% YTD as of yesterday. This rally of about 11% in just a couple of months is a positive indication the market advanced has broadened which is further evidence of a healthy market.
We remain bullish intermediate to longer term. Short term we will view any overdue correction as healthy believing that patience during that time will be rewarded again. The flow of major 3rd quarter earnings reports continue to be stronger than expected. Growing earnings which are not excessively priced, low interest rates and plenty of fuel (liquidity) for the market are the underlying fundamentals that provide us some assurance this bull market still has the energy it needs to prosper. Stay tuned!
Royal Fund Management, LLC
