The headlines are full of market anomalies this time of year. In December it’s the Santa Claus Rally. January it’s the ever original January Effect. After this weekend you’ll see the Super Bowl Indicator. Then comes Sell in May. It’s a seasonal thing, offering a break from the back and forth between stock market corrections and bubble headlines we’ve seen more of these past five years.
As Goes January…
…So goes the year.
This is another anomaly. The theory goes that if the market is up in January, it’ll be higher at the end of the year. But a down January, could bring about a rough year. It makes for fun headlines, but I’m not making investment decisions based on who wins the Super Bowl or what happens in January. I’ll stick to valuation, thank you.
This January didn’t get off to a great start. If you believe the anomaly, that doesn’t bode well for us. But after the last two years, can we really complain? I don’t think so. The market has gone in one direction since the debt ceiling crisis last January. Every move higher gave us another bubble headline to filter out.
It’s been just as long since we’ve had any sign of volatility. Emerging markets were the catalyst this time. Though, you can’t blame every emerging market. Turkey, Argentina, and China are the named co-conspirators. To find the real cause, you’d have to dig a little further.
What it has led to are talks of a market correction again. Despite all the talk, it’s something we haven’t seen in over 400 days to be exact. We’re still counting too. A 10% drop would make it official.
In any case, a correction is overdue and bound to happen eventually. It’s a sign of a healthy market and a cure for that “can’t lose” attitude we’ve started seen in the past.
When that drop finally comes, our first thoughts are toward protection. So how do you protect yourself in case of a correction? Long term investors can start here:
- Ignore the headlines
- Stay diversified – it lowers volatility and losses
- Rebalance – it’s an automatic buy low, sell high mechanism
- Re-weight – more active investors should consider re-weighting their portfolio from overvalued to undervalued assets
- Rely on your checklist before buying or selling
- Always stick to your plan
These are things we should always be doing, correction or not. Maybe a change of perspective is needed too.
Correction or Opportunity?
For whatever reason, the stock market is the only place where when the price of something falls, it’s a bad thing. Yet, when was the last time you complained about paying less for something?
Warren Buffett explained this best in a letter to Berkshire shareholders:
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
I prefer to view market drops as opportunities and this trouble in emerging markets might just be one. Problems in Turkey and China are dragging all the emerging markets down. This guilt by association means some countries or regions aren’t getting a fair shake. Those are the areas where I would start looking.
