What is a rolling correction and are we in one?

Since July 9, the S&P 500 is up just 2 percent and the market is muted at best. The term “correction” for most investors has to do with the stock market or the wildly popular indices dropping 10 percent or higher. Historically, this can take days or months. This can be caused by anything, such as a Federal Reserve action, a war, or unexpected bad news. At the moment there are no news headlines big enough to trigger this standard correction, although there is some expectation as to whether the Federal Reserve will wind down and what that will look like in the future.

The markets initially shot up during this 17-month bull market since COVID put us into an ultra-bad correction/recession/black swan event. However, in recent months, the markets have now become rational as nothing has caused an everyday correction and the market is not going straight up either. This is a market for stock pickers in my opinion. Quality stocks in well-positioned sectors will have much higher upside potential than the general market indices. But what about a “rolling correction”?

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A rolling correction, by definition, is when markets remain relatively flat while gains are phenomenal, which can cause price-to-earnings ratios to fall, causing stocks to be priced lower and their value more in line with historical multiples. This also happens when stock prices fall, but not all at once like a standard correction. An example of this is that 90 percent of the 505 companies in the index in the S&P 500 experienced a price drop of 10 percent or more in 2021 alone. Many would never have guessed or thought that, given the huge annual rise in the market. Since some stocks fell while others rose, the overall market has not suffered a fall of 10 percent or more. This has been done in part by investors loading up value stocks and then selling them year-round for growth stocks. So the pain of a standard correction is gone.

Now the question is where are we going? Well, right now there is over $5 trillion in cash market accounts, which is an all-time high in anticipation of investment. Correction or not, I still think stocks are where you want to be long term and the value is still there. Interest rates are at zero and the Fed with or without its tapering plans should act slowly if and when they actually raise interest rates. Historically, cash will eventually go to work causing these well-positioned stocks to rise in the long run. If we can hedge the risk using structured investments moreover, we are well positioned to perform. As I always advise to be careful, keep diversified investing with a plan and block out the noise from the ‘experts’.

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