As I write this, the stock market is currently down ~10% from it’s all time high. In investor terms, that is frequently referred to as a “correction.” The financial media makes a huge deal out of these corrections, but in the long term they are pretty meaningless. Pull out a chart of the stock market for the last 50 years and try to find all of the 10% or so corrections. They aren’t even noticeable. Of course, most people don’t have 50 years and many retirees have a large part of their retirement accounts in the market, so drawdowns certainly aren’t good for them. This post is mainly for younger people or people that have at least a decade to go before retiring.
First of all, I have heard many investors in the media or on the internet talk about this correction as stocks going on sale. I disagree with that premise. In my view the market as a whole was slightly overvalued near the top and this current correction has just brought it down closer to fair value. Some individual stocks have fallen over 20% bringing them into bear market territory and there are a few that are now attractively valued. But most great companies I follow are either now fairly valued or still overvalued. I think companies such as MKC, ROL, V, MA, and BF.B to name a few are still trading north of 25x earnings, some are still over 30x earnings. They are all world-class businesses, but still expensive. They would have to fall a lot further for me to get interested.
I don’t like trying to predict the market, or muse on the state of the market, but common sense tells us the market is long overdue for a large correction (15-20%) or an outright bear market. It is not uncommon historically for the market to decline ~30% every 3-5 years. This could be a short correction or the start of something worse. I personally have no idea. For a young person with some spare cash, it’s probably a good idea to put some to work right now. I still think the S&P is still a little expensive, but if someone were to look for a few stocks that a really beaten down and below their historical valuations and buy a little chunk, that would be rather prudent. I must repeat that I don’t agree with others who say stocks are currently either on sale, or at fire sale prices. Were those investors around in the fall of 2011 or the start of 2009? THOSE were some fire sale prices.
If I had to guess I think the correction goes a little deeper and the market recovers. I must stress that it is much smarter to buy based on valuation and not on guessing the direction of the market. If one has 10+ years before the need to sell and a stock of a great company is attractively valued, then go ahead and buy. People who bought in October of 2008 and rightly assessed that most stocks were cheap, had to deal with an additional 30-40% decline in the next four months. Obviously no one wants to buy and watch their holdings immediately decline by that much, but if they held until today, they did very well. The point is to buy based on fundamentals such as earnings, sales, free cash flow and dividends, not on economic or market indicators.
Additional disclaimer: The opinions in this article are my own and I am not an financial/investment adviser. Investors need to do their own research or consult their financial adviser before making any decisions.