Fisher Investments Editorial Staff
Globalization, Developed Markets, Market Cycles

Timing (Isn’t) Everything

By, 03/22/2010

Story Highlights:

  • Global markets have recently recovered from their early 2010 pullback (some would call it a correction) and regained 18-month highs.
  • A correction is characterized by a 10-20% drop—short, sharp, steep—precipitated by a story out of nowhere that seems disastrous at the time but turns out much more benign.
  • Short-term volatility, even corrections, will certainly happen—it's useless to try to time these movements.

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Global markets have recently recovered from their early 2010 pullback (some would call it a correction) and recently regained 18-month highs. Sovereign debt concerns, with Greece at the forefront, likely fed volatility as global investors got caught up in talk over bond spreads and the possibility of default. And this conversation is ongoing—officials are still debating today whether Greece will receive support from the EU or the IMF—they're not out of the woods yet. But investors have seemingly moved on.

 

A correction is characterized by a 10%-20% drop—short, sharp, steep—precipitated by a story out of nowhere that seems disastrous at the time but turns out much more benign. Due to the unforeseen nature of the (frequently sensational, fleeting, and/or overstated) underlying cause, these market movements are inherently impossible to predict—not to mention they're typical, even expected, features of bull markets, and thus don't warrant deliberate portfolio shifts. Trying to time a correction (by jumping in and out of the market) is a fruitless endeavor, as investors can be left holding the bag on transaction costs and potential tax implications—erasing any initial perceived benefit.

 

The recent sovereign debt story is not unlike past headlines that have caused market pullbacks: In 1998, fears of an Asian debt crisis and an over-leveraged hedge fund (Long-Term Capital Management) briefly but deeply roiled stocks—which then carried on to greater highs. Stocks dropped in late 1999 on Y2K fears, but then recovered before yearend as people realized their concerns (of impending doom, no less) were unwarranted. At a 2006 Washington dinner party, Fed Chief Ben Bernanke surprised CNBC anchor Maria Bartiromo with his remarks about interest rates—markets plunged. But the associated inflation fears waned and the bull market continued its upward charge.

 

Now, with stocks finally nicely positive on the year, pessimism is inevitably rearing its head, leaving investors wondering what's next. Will another out-of-the-blue story line throw markets for a loop? It's impossible to know—that's the key lesson investors can take from the recent pullback. And with the health care debate reaching fever pitch over the past few days (we'll definitely have more to say on that this week!) politicians are sparring over massive, controversial legislation. Markets may have already priced in any potential political surprises here, but we'll have to wait and see. Short-term volatility, even corrections, will certainly happen—no use trying to time them.  

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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