- After a strong bull market run, a correction this year should be expected and not feared.
- A bull market correction is typically short and sharp—and shouldn't be mistaken for the start of a bear market.
- Corrections are a normal part of stock markets and don't alter the overall bull market trend.
- Trying to avoid short-term corrections could mean locking in losses or missing out returns.
After the big, bad bear, investors intrepid enough to stick with the market have been treated to something pleasant—a nearly uninterrupted surge of 78% from the March 2009 bottom through Wednesday. Global stocks briefly pulled back 8% starting in June into July, but June overall was down just 0.6% and July recovered to post an 8% return. October was down a meager 2%. Other than that, it's been smooth sailing. Seems like the perfect time for the stock market—otherwise known as The Great Humiliator—to strike with a gut-wrenching correction, fooling as many investors as possible to bail on the bull.
Following a hugely positive day in global stocks, it can be hard to imagine a correction is lurking. That's just how TGH operates! One of the trickster's favorite ploys is striking out of nowhere—fooling investors into thinking a correction is the start of a new bear. But those clever enough not to be hoodwinked realize the difference between a bull market correction and a bear market is huge. Corrections—short, sharp drops usually provoked by a fantastic story scaring the heck out of investors—are normal (though terrifying) and expected during bulls. They're lesser in overall magnitude and duration than bear markets and often occur suddenly—you see none of the rolling, grinding top that typically signals the end of a bull.
What can you do when correction strikes? Usually—nothing. This is decidedly counterintuitive. In the face of sudden, sharp losses, our natural instinct is to do something. This is almost exactly wrong. Because corrections move fast—both on the way down and up—trying to avoid part or all of the correction tends to lead to major whipsaw. And if fear drives you out, how will you overcome it to get back in? Markets tend to jump, not stroll, out of correction dips. Odds are you sell at a relative low, incur transaction costs, and possibly incur a taxable event to boot. Remember, by not doing anything, you are still doing something.
Another reason to suspect a sudden onset of market losses is a correction, not a fresh bear: Barring the onset of some big, bad, previously unforeseen and little talked about negative fundamental, today's fundamentals overwhelmingly support an ongoing bull market. To name just a few: Corporate earnings are likely to surpass expectations, companies' balance sheets are flush with cash, and credit spreads are narrowing.
Pessimism is still rampant, and following the huge market surge, folks may be eager to believe the market run is over (we're a cynical bunch), but these are simply just more bricks in the wall of worry that typically drive bull markets forward. When these fears are not realized, the market will take note and continue to push forward, with or without the doubters. Not to mention, second years of bull markets, even after powerful surges, are overwhelmingly positive. Sure, corrections can happen out of anywhere, but they shouldn't derail the bull.
Trying to time a correction is nearly impossible—don't attempt it. Anyone can give into fears, pessimism, and crowd mentality—what distinguishes a successful investor is discipline and patience. The sooner most investors realize that, the less likely they'll be tricked by the ultimate trickster—The Great Humiliator.