The run-up in stocks this year has been quite compelling so far. The S&P 500 is up +19.7% on the year as of August 51, and global stocks as measured by the MSCI World Index aren’t far behind at +14.34%.2
This strong performance has many investors asking: what is the probability of a stock market correction occurring sometime soon? Are there strategies to handle market corrections? Should I take some profits now as a short-term market timing strategy, so as to avoid any downside of a market correction?
In a series of posts on stock market corrections, we’ll address these questions one at a time.
What is the Probability of a Stock Market Correction Sometime Soon?
Stock market corrections are normal occurrences in the markets. In fact, over the last 33 years the average intra-year decline for the S&P 500 is -14.7%.3 Using history as a guide offers some insight into a few examples of past stock market corrections (click on the chart for a larger version):
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From July 7, 2011 to October 3, 2011, the market took a quick, steep drop, losing some 18.77% in value.1
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From April 2, 2012 to June 4, 2012, the market fell 9.93%.1
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From September 14, 2012 to November 15, 2012, the market pulled back 7.67%.1
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Earlier this year, from May 20 – June 24, the market dipped 5.76%.1
As you can see from the four points above, corrections within bull markets can vary in magnitude and duration. However, they are unpredictable. Using the data above, one could make the observation that the past three pullbacks noted are smaller in size than the -14.7% average intra-year decline mentioned above for the S&P 500. With that in mind, it might not be surprising to see a correction of greater magnitude sometime in the future of this bull market.
Should I Make Changes to My Portfolio Ahead of a Stock Market Correction?
When considering the probability of a stock market correction, investors often wonder what changes, if any, they should make to their portfolios to prepare for a potential pullback in stocks. Are there strategies to handle market corrections instead of just weathering the dip? Could a plausible short-term market-timing strategy be to sell out of some equities, take a profit, and wait until the correction ends before re-investing?
We’ll address these questions in our next post on corrections. In the meantime, to find out if your portfolio is appropriately positioned for a possible market correction, call one of WrapManager’s Wealth Managers at 1-800-541-7774 to discuss your current allocation and strategy.
Sources:
2 MSCI
