The stock market has been choppy to say the least, with the S&P 500 having lost nine percent of its value. The index has also erased virtually all of its gains in 2018. Many investors are wondering if this is a short-term correction or if a Bear Market is just around the corner. Should investors run for the exits or can they profit off of all the uncertainty?
Stock Markets Choppy, Are We Out of the Woods Yet?
Between October 3 and October 26, the S&P 500 lost more than 10% of its value, pushing the index into correction territory, which is defined as a drop of at least 10% or more from its recent high. The NASDAQ fell into correction territory and the Dow industrials has shed almost nine percent since peaking on October 3.
Is more pain on the way? Investors have certainly become more concerned. On Monday, October 29, the CBOE Volatility Index, or fear gauge, touched an intra-day level of 24.69; having increased almost 100% since the start of October, where is entered the month at 11.99.
The VIX falls when stocks rise and rises when stocks fall. That’s because it measures how much traders are willing to pay for protective option on the S&P 500 in the coming 30 days. For this time of year, a reading of around 20 is average. The current levels show that investors are increasingly concerned about the market’s direction and are seeking protection from a larger downturn.
The markets are, for the most part, in correction territory and a Bear Market, which is defined as a loss of 20% or more, is certainly not out of the question. For that to happen though, optimistic investors have to give in to the market fears and sell their holdings, which would send stocks tumbling even further. Optimistic investors are certainly more cautious right now, but they haven’t given in to market fears just yet.
But they could.
Yes, the U.S. economy is chugging along, and corporate earnings have been strong, but there is a lot of other reasons why U.S. and Canadian stocks could fall into Bear Market territory. There are ongoing concerns about the ongoing trade war with China, and how it will impact U.S. stocks. Rising interest rates makes borrowing more expensive and could put the brakes on the U.S. economy; seasonal volatility; concerns about the U.S. housing market; a weak earnings outlook; and fears that the longest bull market on record is in its later stages, and a recession is on the horizon.
Are stocks simply taking a breather or is the current sell off just getting started? It will make a difference to your portfolio. Since 1900, the markets average around one correction annually and investors suffer through a Bear Market every 3.5 years.
The average stock market correction lasts an average of 10 months, with equities falling 13%. The average Bear Market lasts for 15 months with stocks falling 32%. Not all Bear Markets are created equal. The last Bear Market lasted 17 months, from October 2007 to March 2009, with the Dow losing 54% of its value.
The markets have been pretty consistent with historical, short-term corrections, but investors haven’t lived through a Bear Market in a long time. If there’s one thing we know about stock market cycles, a Bear Market is definitely coming.
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Photo Credit: iStock.com/monsitj
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