Why Are Global Markets in a Correction?

Good day,

As I type this, North American markets are hovering around correction territory. The definition of a market correction is a 10% decline or more from the peak and the S&P 500 is showing a 10.4% decline, The Dow Jones 10.8% and the TSX a 9.19% decline as I type this. The definition of a bear market is a 20% decline and it remains to be seen if we get there or not. While regular corrections are healthy for financial markets, my view is that reaching and putting a bear market behind us would prove to be a sigh of relief given that the current bull market is nearing 9 years.

Such a long period without a bear market is a psychological barrier for investors which can hold markets back from reaching their full potential. A bear market would also bring value investors to the table in addition to those investors which have sat on the sidelines waiting for a meaningful dip. Fundamentally speaking, whether we wish for one or not, a bear market shouldn’t occur as the global economy is strong and corporate earnings continue to grow.

Argus, one of our research providers in the US has done my work for me today and provided a very good overview of why the markets are in correction territory. See below:

“After a strong start to the year that carried across most of January, stocks struggled at month’s end and were slammed early in February. In fact, stocks are now experiencing their first meaningful selloffs since the twin corrections around Brexit (-3.8%) and the U.S. pre-election 2016 summer (-4.5%). The S&P 500 experienced a steeper selloff (-11.2%) from December 2015 to February 2016 amid the trough in energy prices. The U.S. stock market did not experience a single sizable (5%) correction in 2017. Why are stocks selling off now? Investors cannot point to the usual suspects. Unlike two years ago, when investors feared that weakness in energy prices signaled declining global demand, the global macro environment is at its strongest level in years; after 3.7% growth in 2017, the IMF forecast global GDP growth of 3.9% in 2018. The weak dollar is helping to lift commodity prices, whereas two years ago the strong dollar was making oil cheap and most oil producers unprofitable. Regardless of why stocks are selling off, we see no signs that this long-running bull market is at risk of falling into a bear market. The economic and earnings fundamentals remain compelling, as we detail below.

The stock selloff in early 2018 has several causes. The rise in bond yields has been interpreted as a preemptive strike against inflation; and inflation has proven in the past to be a surefire stock rally killer. After several strong years, the U.S. consumer may finally be taking a pause. In addition, apart from post-hurricane rebuilding, neither housing not automotive appear particularly robust. The main correction driver may simply be profit-taking following a strong 2017 and an eye-popping January 2018. Stock selloffs are nerve-wracking but necessary. Market complacency such as that seen in 2017 saves investors from short-term worries about wealth accumulation. The lack of periodic selloffs, however, increases the risk that the market will become toppy and prone to steeper falls. Corrections can be thought of as bad-tasting medicine that, like castor oil, can keep the market mechanism functioning smoothly.”

Have a good weekend!

Danny

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Daniel Popescu CFP, CIM, FMA, FCSI
President & CEO

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