"Correction"
is a cute word that describes a stock market decline of 10-20%. This
is a normal part of unpredictable stock market cycles. The good
thing about corrections is that they only happen after the market has
risen substantially.
That's
what the Standard and Poor's 500 Index and the overall stock market
has recently done. So far in 2013, the S&P has risen 14% with
only two short 3% dips. Since January of 2012 the market is up 31%
despite drops of 8% and 10%.
Just
to remind those who call President Obama a "socialist,"
since he took office in January of 2001, the S&P has doubled its
value. The oil man from Texas who preceded him ended eight years in
office with the S&P lower than when he took office in 2001.
I
love it when the stock market is on a prolonged upswing. My clients'
accounts grow in value, though not as fast as the S&P since most
accounts are well diversified, not 100% in large stocks that the S&P
represents. Still, I get nervous when the market is this happy. A
correction is sure to come; it's just a matter of when and by how
much.
What
has amazed me most during the last year or two is that so many people
are still
avoiding the stock market, having been severely traumatized by the
corporate misbehavior of 2007 and 2008. This caused many to lose
faith in the stock market, assuming it is a rigged game. It was hard
not to come to that conclusion. The stock market is not fair, but
what are the alternatives: gold, real estate, bonds, bank accounts,
cash in a mattress? All these have their risks. "Safe"
alternatives such as savings accounts and CDs pay just a fraction of
1% in interest while the buying power of that money shrinks due to
inflation. The interest rate game is truly fixed because rates are
set by the Federal Reserve.
Back
to the coming correction. It might be caused by concern that stock
prices are over-valued, having risen too high, too fast. Bad
economic statistics, a tragic incident or a global political event
could trigger this, too.
When
the correction comes, remember what has happened lately. Don't let
it become an excuse to stay away from the stock market for years to
come. The stock market will get happy again, just like it is as I
write this.