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August 6, 2021

Are Your Investments Chasing Bubbles or Just Cooling Off?

It's been a great run on Wall Street. It has been just since September that the stock market index soared from 2,700 to 35,000. This is an extraordinary accomplishment, especially given all the challenges put upon us since 2020. Now that the shell-shocked investors are told that the Delta version is a bigger threat to the world than was the COVID-19 onslaught. Additionally, drought, flooding, and other natural disasters have lashed out globally in biblical proportions. Meanwhile, political chaos is ruling many places on the planet. Yet, the street party keeps rolling on.

Based on the dire warnings coming from the talking heads, you'd be led to believe we are in need of more than just a correction. After all, we think of a correction as a minor adjustment, like a typo that can be easily fixed. Is all the talk on Wall Street about investors chasing bubbles for real, or will investors continue running with the bulls? No one has a crystal ball. Unfortunately, the only way we have to predict the future of Wall Street is by studying past behavior. Yet, these are unprecedented times. In spite of the uncertainty lying ahead, most prognosticators agree that the market is certainly due for a correction. But what exactly is a correction?

A Correction is '...the Saucer That Cools the Tea'

To paraphrase Thomas Jefferson, a correction is"...the saucer that cools the tea." Jefferson was referring to the lengthy process that legislation must travel through before it's passed into law. In the same manner, a financial correction on the market serves to cool off an overheated Wall Street. Historically, a market correction is a short-lived affair. A stock meltdown could be particular to a single read about Activision's 10 Billion Dollar hit occurring this week). the result of a big board downside. Typically, corrections occur every 4 to 6 years.

When seismologists detect movement from underground plate tectonics, they try to gauge the event in terms of its surface tremors. Armed with this information, they can determine if the planet is just making an adjustment or if it is a precursor to a much more violent outcome. The market watchers perform the same function in anticipation of market fluctuations.

The following are 4 factors to watch for in making any decision about changing your investment strategy. You know you are in a correction when:

  • The market has decreased by 10% to 15% from its recent peak: Corrections occur when exuberance replaces common sense and ignores the market's natural cycle of ebb and flow. Additionally, corrections can happen to individual assets, like an individual stock or bond, or when an index measures a group of assets. So, regardless of the asset (art, gold, Certificates of Deposits, etc.), there may be few safe havens that offer protection from a correction.
  • It's been 4 to 6 years since the last correction. What has especially shaken younger investors is that it's been 4 years since we've experienced a correction. Investopedia reports that, in 2018, the Nasdaq and the S&P 500 both experienced two corrections. This is a new experience for the uninitiated. The markets quickly rebounded. Based on past performance, this correction is right on time and should be short-lived.
  • Market Indicators don't call for a crash scenario. Back in January, Forbes reported that many institutional investors were preparing for a major market sell-off. Indicators such as risk appetite indicators (that measure whether investors are buying risky or safe assets) were unusually high, while market volumes have been low. This index indicates a tactical, rather than catastrophic correction.
  • Private equity crowdfunding offers an alternative to market volatility. In a recent article published by Entrepreneur Magazine, Catherine Clifford, Senior Entrepreneurship Writer at CNBC, she writes "Some investors may see a prolonged downturn as an opportunity to double down on their investment in startups. In a three-year bear market, an accredited investor may determine that investing in startups has the potential to pay off more quickly than investing in stocks." The crowdfunding alternative to public equity markets gives small and medium-size investors an opportunity to leverage their investment through more start-ups than the traditional public equities market in the event that what we are experiencing is more than a correction.

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