The long-feared market correction has arrived. But is that necessarily a bad thing?
We knew this was coming eventually.
After months of premature warnings that the sky was falling, the long-anticipated market correction has finally arrived. The boy is no longer crying wolf on Wall Street.
The numbers have been ugly for weeks. Today, things may have reached a tipping point … at least we hope this is the tipping point.
Just look at this chart of the past month:
Since closing at an all-time high of 2,011 on Sept. 18, the S&P 500 has plummeted more than 8.5%. We’re on the cusp of the first true correction (10%) since July 2011. Until this week, no pullback in the last two years had exceeded 6%.
(I will pause here to give you a chance to take a big gulp of Maalox …. ….. …… Feel better? Good.)
Now, let’s get on to answering the important question: What does it all mean?
Is Ebola panic spilling onto Wall Street? Is it the Fed pulling the plug on QE3? Is Europe’s threat of an unprecedented triple-dip recession weighing on U.S. markets?
Certainly those factors, and others (Russia-Ukraine, ISIS, uneven U.S. GDP growth, etc.) aren’t helping. But … no.
The real reason for this sudden crash? It’s simple: stocks were overbought. Or more accurately, the overwhelming impression on Wall Street was that stocks had become overbought.
Entering the week, stocks were trading at 15 times forward 12-month earnings estimates, higher than both the five- (13.5) and 10-year (14.1) averages. However, as the bulls would quickly point out, that ratio still trailed the 15-year average of 15.8. It also trailed the ultra-high forward P/E ratios around the turn of the century, which were routinely above 20.
Nevertheless, if enough people – particularly people with very public platforms such as CNBC and Yahoo! Finance – say that stocks are overbought … eventually, investors start to believe it and it becomes a domino effect.
It might be a while before that last domino falls. Stocks may not stop at a 10% correction. They could fall as much as 20%.
That’s the bad news. The good news is that this is likely a short-term correction.
Since the 2008-09 recession, both times stocks have fallen more than 10%, they’ve taken less than six months to bounce back above their pre-correction level. Take a look at this five-year chart:
Unlike Europe, we’re not headed for another recession.
Unemployment is below 6% for the first time in more than six years. Corporate earnings continue to grow. The big banks are no longer under water. We’re not headed for a two-year crash like we saw in 2007 or 2002. Eventually, this pullback will be a good thing, allowing many of you to buy stocks that aren’t already trading at all-time highs.
But this correction is real. And it shouldn’t be a surprise.
Six times BIGGER Dividends – with this one stock
The average yield of the Dow has sunk to 2.1%. That’s just sad. However, we know of one group of investors collecting up to $550 every 30 days… from a little-known investment that yields a whopping 12%! That’s roughly six times bigger than the average yield of the Dow. If you’d like to tap into this income stream, and earn six times bigger dividends, click here for our full report on this opportunity.