The market has retreated into correction territory again meaning that it is off over 10% from the high. Corrections are a normal process in the context of all bull markets and historically, there is a correction an average of once a year. It has been about two years since the last correction in early 2016. It is interesting to note that the Dow Jones Industrial Average (DJIA) was at about 15450 at that time, well below where it is today at about 24000. In other words, be patient. The market has recovered from a correction on average, in about 14 weeks. Though difficult, try to avoid making emotional decisions. Investor returns have historically been half or less that of actual market returns due to emotional decisions that in hindsight were proven wrong.
Underlying fundamentals remain sound. The S&P500 Price to Earnings Ratio (P/E) is about 16.7x which is about average over market history. Bear markets form during periods of extreme excess and that is not the case today. The P/E to Growth Ratio (PEG Ratio) is .81 meaning that earnings are expected to grow at a higher percentage than the P/E Ratio. About a third of the way through corporate earnings season, over 80% of companies have exceeded market expectations.
Interest rates have risen which creates some market headwind. However, rates are going up due to the perceived acceleration of economic output, which may ultimately be good news. The concern has not been so much the interest rate itself but rather, the recent rate of change. In other words, how high will rates go before levelling off? We continue to believe that equities will remain the better choice over bonds for the foreseeable future.
We remain bullish intermediate to longer term and that this correction, like those before, will be resolved in a fairly short period of time. Again, we believe patience will be rewarded.
Some fun facts:
The DJIA first closed above 1000 in November 1972. It closed above 5,000 November 1995. In March of 1999 it closed above 10,000 for the first time and this January, the DJIA closed above 25,000 for the first time. I believe it will hit 100,000 during my lifetime. As Warren Buffet has been known to say, “Don’t Bet Against America”