As I briefly alluded to here, market corrections happen… and are a regular part of life. We saw last week that markets are subject to movements as a result of non-fundamental information, like allegations that President Trump leaked unreleasable information to the Russians. With the added allegation that he fired former FBI director Comey to calm the heat of the Russian ties investigation sent markets into a tailspin. Is this reaction a new, terrible normal for markets? Not exactly.
CORRECTION = a decline of 10% or greater from market or stock highs
Market corrections are normal, healthy releases of emotion from market prices. When times are good or investors expect a positive future, money flies into stocks in anticipation of future growth. Much of the “Trump bump,” the growth in stock markets since Trump’s election, is built on the premise of imminent rollback of regulations and favorable tax reforms for businesses. Without tangible changes to these regulations and tax code, though, the increase in prices represents over-exuberance. This is Vegas-style betting on the future. Corrections are the conduit for tempering these risks built into prices. Though last week’s market drops were short of correction territory in a single day, many individual stocks and some sectors did reach the threshold.
SO WHAT? Corrections are an excellent opportunity to buy. If you look at your watch list, most of those stocks that seemed too pricey for you likely dropped enough to take a second look. The question is 1) where you ready and 2) did you take that second look? Smart money would buy on that dip (dip = price drop). Let’s work to be prepared for it next time.
Comment and let me know if you bought on this dip.