Correction Time

The S&P and Dow are both down 10%+ from their recent highs.

Despite my large cash balance, I am also down about 5%; in part this is due to my over-exposure to the energy sector.

Volatility has been resuscitated from its death bed. While there is nothing to be super-excited about yet, let’s just say, things have started getting interesting.

Here are some resources to put things into context”

  • A Field Guide to Stock Market Corrections: The base rate of a 20%+ bear market given a 10% correction is 50%. Thus, the odds of a continued decline in the market, or a recovery are about even.
  • What Past Market Declines Can Teach Us: 10% corrections are quite common; they occur about once a year. When they don’t deteriorate further, they take about 4 months to heal. 20% declines are also surprisingly common; they occur about once a leap year. On average, they take an year to climb out of.
  • Putting Pullbacks in Perspective: There have been three declines of 40% or more since 1945. They have taken about 5 years to recover from. Longer bull markets (time since last 10% correction) lead to deeper stock market losses. Based on the length of the current run (about 1.5 years), the regression line (in the linked article) suggests that we should expect a pullback of about 15%.
  • The stock market over the last 200 years: This article from Basehit Investing always provides a valuable lens with which to see any current market turmoil. Volatility is a natural part of the stock market. Patience is key.
  • Testing Times: Aswath Damodaran takes a deep breath, and takes a clinical look at the underpinnings of the current market conditions.

For some reason looking at numbers, and zooming out to see the bigger picture in times like these is helpful. It prevents my reptilian brain from retreating in panic or doubling down in hubris.

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