The following commentary was first posted on my other business site – http://www.FundTraderPro.com. FTP is a robo (online) advisor that provides specific investment recommendations for individual’s 401k plans. Recommendations are specific to the investments available to each plan. If you, or someone you know is looking for investment help with their 401k please suggest they check out our site: www.FundTraderPro.com
I was watching the investment news the other day, and in an interview a well-known money manager was asked when he expected a 5% correction. I honestly didn’t expect him to take the bait, but instead he responded that a 5% market drop could happen at any time; it could be imminent, could be weeks, could be months away. News sites across the internet then blasted out headlines like, “Top Money Manager Says Stock Market Correction is Imminent”. My answer would have been, “A 5% market drop is not a correction, it’s just a couple of bad days!” But this is the stock market world we now live in. ANY drop of any kind, even just 5%, is met with Chicken Little’s coming out of hiding and screaming about the beginning of the next great selloff.
For perspective, a real correction is a drop of at least 20%. Drops of 40% or more typically come once a decade (note: financial crisis was 10 years ago). !0% drops are normally once or even twice per year. Point being is that volatility is the norm for the stock market. It is not to be feared, but planned for and taken advantage of.
The reality is that, yes the market is very highly valued by any and all measurements of value. But high values do not mean an imminent correction. Major bear markets, the -40% kind are precipitated by a slowdown in corporate earnings. The tech wreck came because technology advancement finally started to slow. PC’s and laptops had the speed and memory to match most needs; the internet while slow, was at least capable of providing access to countless new web oriented services; millions of miles of fiber optic cable had been laid… Earnings started to slow. An overvalued market started to crash in the spring of 2000. While the 2007 bear market is termed the “financial crisis”, it was the effect that the financial crisis had on corporate earnings that caused the market to crash. Earnings crashed…stock market crashed.
We are just not there in today’s economy. Corporate earnings are growing. Europe is growing. China is at worst, no longer a drag on the global economy. Deregulation, tax cuts and maybe a premium break for the middle class and small businesses saddled with Obamacare all bode very well for the future of the economy and earnings. A 5% “correction”? Sure, anytime and it won’t be a problem. But the next big one? Still a ways off, but with valuations so high it would be wise to have your exit strategy planned.
At Fund Trader Pro many of the 401(k) plans will be reviewed at the end of the month. Barring a big change in two weeks we expect plans to remain fully invested and allocated aggressively – foreign, emerging markets and U S Growth oriented funds have dominated this year. We expect that to continue…but are plans are at the ready should we be wrong.
For 401 Advisor, LLC clients we are staying true to our dividend income strategies. While yields are getting harder to come by, the market keeps throwing us a few bones here and there. We’ll be looking to pick up a few unloved, but higher yielding gems over the next few weeks.
Bill DeShurko 