Although the equity markets have been much more volatile over the past couple weeks, the S&P 500 and Dow Jones Industrial are down only 2.5% and 2%, respectively, from their recent highs. You might say we are overdue for a correction since it’s been 7.5 months from the last 5% correction in the S&P 500, and over 27.5 months since the last 9.9% correction ended on June 1, 2012.
On the technical side, we are seeing some signs which raise the probability of a 5-10% market correction in the month ahead. Thus, we’ve locked in some gains in the financial sector by decreasing our allocation to that sector as an early precaution. As you may recall from my previous market commentaries, the financial sector has been the second-worst performing sector during the final 12 months of a bull market dating back to 1972. Considering that we are probably in the final 12 months of the current bull market, and the financial sector is just off its 52-week high, I felt this was a good “sell high” opportunity.
With a market correction seemingly inevitable, wouldn’t it make sense to sell everything and wait on the sidelines, locking in all the gains from this year? Not quite. Corrections are a healthy part of every bull market, and while they come around frequently, they are unpredictable in timing and size. As a result, it would not be prudent to sell everything in anticipation of (or in the midst of) a correction since you wouldn’t be able to predict/time when the correction is over and get your money reinvested for the ride back up.
From a fundamental standpoint, the economic evidence remains fairly stable with September’s Consumer Sentiment survey from the University of Michigan/Reuters rising to a 14-month high. More important, all the gain came in the “future expectations” component. A week earlier, the Conference Board’s Leading Economic Index rose again for the seventh month in a row; indicating that the economy should continue to improve through the end of the year. At the same time, new claims for unemployment came in considerably below economists’ estimates. However, housing showed signs of a pause, with both building permits and housing starts declining in August.
So to answer the initial question – Correction or Recession? The short answer appears to be correction. Despite the recent weakness, my analysis still indicates that we are in a bull market until we see more of a decisive move in the technical indicators. At this point in an aging bull market, I’m comfortable moving forward with our current invested position with a slight reduction in the financial sector as we wait for the technical picture to unfold further.
Please contact us at 913.402.6099 if you would like to discuss your current investment strategy and to receive a free analysis of your portfolio.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.
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