Correction Is Here, Finally

After more than four years of steady climb, the markets finally experienced a correction — all major indices are now 10% or more below their peak.  On average, market corrections occur every 18 month, so this particular one was long overdue.  In a way, it is a good thing to have that correction box checked — investors who were sidelined waiting for the correction will now how have one less reason not to be in the market.

The market drop over the last few days was, for all intents and purposes, made in China.  Fears of slowdown in Chinese economy and its market crash of over 40% caused worldwide equity rout.  Whether the extent of the drop was warranted is hard to say.  Note that the Chinese economy slowed from 7% yearly growth to probably around 5% – a number that is still much higher than the growth of any developed country.  Also, Chinese stock market had a huge rally earlier this year, and even after that 40% crash, it is still at the level of the beginning of 2015.

What happens now is anyone’s guess.  Often, and especially in situations like these, daily fluctuations of the markets are not driven by economic fundamentals, but by hordes of traders unable to control their emotions.  Historically, once the markets decline by 10%, there is a 50% chance that they will continue to decline further into bear market — that is, a drop of 20% or more from the peak.  That’s the bad news.  The good news is that there is 86% chance that the markets would be at least 50% higher in 5 years.  These are pretty good odds!

What is happening in the markets now is completely normal.  That is what markets do, once in a while.  It is the nature of the beast. The last few days were not fun, and the roller coaster ride will probably continue.  But days like these are the reason why equity investors in the long term are paid more, a lot more, than any other kind of investor.

The financial media thrives when markets are volatile.  You are going to hear all kinds of experts predicting the future, and stories of high-profile investors and entrepreneurs in the likes of Bill Gates or Mark Zuckerberg who lost billions of dollars in a few days.  But after the dust settles and the markets continue their inevitable climb to new highs, it will be clear that they didn’t lose anything.  Because, chances are, they didn’t sell.  And neither should you.