Correction or Bear Market?
Investors have been scratching their head lately, trying to figure out this bi-polar market. By all accounts everything looks rosy. The economy is operating on all cylinders, corporate America is basking in success, inflation has limped only slightly higher, and most importantly of all; The Boston Red Sox won the world series! How much better can it get?
Then why have investors taken it on the chin so hard in the last 6 weeks, with the S&P 500 dropping almost 12% from its high reached on October 3rd ? Other markets have fared even worse with the Nasdaq getting hit by 15% and the international emerging markets almost 28%.
Most pundits are blaming the Federal Reserve for raising interest rates so many times, believing that they are overdoing it and will force an unnecessary slowdown. They may have a point. The Fed typically increases interest rates to combat inflation. However, inflation has hardly increased even though we have strong growth.
The real culprit for this correction is what few are talking: The byproduct of a strong economy and rising rates – a stronger dollar.
Nearly 30% of S&P 500 earnings comes from overseas. Therefore, a stronger dollar could hurt corporate earnings. This is what investors are likely grappling with right now and whether these companies can increase prices enough and/or sell more to offset the lost revenue.
What we need to keep in mind is that these are good problems to have. Rates are rising and the dollar is strengthening for a reason.
Long story short, I think once investors figure out that the bad news might actually be good news, stocks should continue their rally. Corrections are painful, but necessary. They really hurt when you are in the middle of them, but it’s important not to overreact.
For retirement investors, the world is a different place. You can’t afford or survive another big downturn, so prepare accordingly. Put your retirement master plan firmly in place, making sure you are investing tactically (never buy-and-hope), have an asset protection system behind it, and that you are employing a forward looking tax-strategy so you can achieve success. It’s what we help our clients do every day.
If we can help, just give me a call.
Cheers -Keith Springer