Right now the market is plummeting at an alarming rate. We're dropping 1-3% across all indices daily, and oil is under $30/barrel. What does an investor do in this kind of situation? Every time you check your brokerage account, you see red numbers. Is it time to pull out?
“What's going on with the market?”
Personally I think the climate we're in points to a correction. Strong job and GDP numbers indicate that the basis of our economy is strong, it's our overpriced equity and China that are weighing us down. The oil glut and weak energy sector have injured large Fortune 500 companies, but not to the point of a recession. Oil and China will recover.
Corrections are a natural part of any economy. It takes low points in order to create value and growth. According to the investment arm of Deutsche Bank, the US economy goes through a correction approximately once a year. That being said, our last correction was in August, which is not too far behind us. So is the market we're seeing right now just a continuation of August's volatility, or are we getting our next correction sooner than we expected?
Without a doubt August's correction has had some impact on the beginning of this years economic standing. Oil prices took a nose dive last summer and we're still feeling the reverberations of an injured energy sector. The lows we found in September of last year brought us near bear market territory, and companies across all sectors felt it.
“What should I do?”
It depends on your situation. Value-investing is my specialty, and I think the majority of normal investors tend to lean that way as well. Many top tier investors like Warren Buffett, Bill Ackman, and Carl Icahn agree that volatility can be a value-investor's best friend.
When you have holdings in a fund or company, and you're in it for the long haul, corrections are a good thing. In essence corrections for long-term investors are coupons. They bring the price of equity down so that you can buy more stock for your dollar. With the inherent growth in the market, your long-term holdings will return to their original price and continue to rise.
For all you traders out there: good luck. If you're a trader who makes hundreds of transactions a year, you may have found yourself in a world of hurt in the past couple weeks. However there is an end in sight. The energy sector and oil can only drop so far. There are points at which oil prices have a base or bottom-line, we're just not exactly sure where. Some speculated $35/barrel, others say oil could go as low as $15/barrel.
“How long do I have to wait until the market recovers?”
Data from the Dow dating back to 1945 suggests that most corrections last about 90 days. Some last longer, some shorter. Because of the short time between the last correction and this one, some analysts are suggesting this correction will be more mild. Whatever the case is, everything will be okay.
As we stated, 90 days is the average length for a correction. We're on week 3 of our current economic downturn, so I can't lie; we will continue to see more losses in the coming weeks.
Equity prices have to reach a certain level where they ‘bottom out.' The end of a correction is normally spurred on by speculators and analysts releasing reports saying that equity prices have reached new low records. 52 week lows are brought to light, and investors want to jump on the value bandwagon and they start buying again. As more and more investors buy, group mentality kicks in, and we see the market rise.
To sum that all up: we're in a correction right now. Yes, it sucks. Long-term investors are fine. Buy good value stocks when the market gets low. Good luck to all the high-frequency traders out there. We will be okay!
My site CollegeInvestr.com covers topics ranging from basic budgeting to market research and commentary. My main focus is to provide information for young investors trying to build wealth and reduce student loans. If you’ve liked this article, come check out more of my material!
David's main goal is to provide finance and investing education to young college students looking to pay off student loan debt and increase wealth.
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