For the last 6 years investors and pundits have been on the lookout for the next correction. We finally got it and August 24th and 25th were the low points with a brief retest of those lows on September 28th and 29th. In the end we had about a month and a half of panic, hand wringing, selling, and high volatility before things turned around and headed up.
All in all, while the panic was very real (as seen on August 24th with a 1000 point drop at the market’s open), it seemed to me to be over awfully quickly. October saw the market gain back almost all that it lost in what was one of the best performances ever for that month!
So here were are, about even for 2015 and it almost feels like that 10%+ correction was sort of a drill. It showed new investors who had never seen a serious downturn what one felt like but that was about it. Any investor who was able to hold on to their stocks was able to get most everything back in very short order as though nothing ever happened. To me, that correction felt too short to really do any good.
One thing a correction does (beyond bringing stocks back to more realistic levels), is to teach lessons:
1) It shows investors that they should not always expect positive returns and it makes them slow down in their enthusiastic buying, hopefully transforming them into more cautious stewards of their money.
2) It helps investors identify their risk tolerance and for anyone who is new to investing, figuring that out is extremely important. I suspect there were a lot of younger investors out there who had yet to have their risk tolerance truly tested because they had yet to experience any significant drop.
3) Finally, it also flushes out weak investors which is needed to get rid of the excess froth many stocks take on during boom times. Most experts agree that corrections are healthy for a market as they help to reset things when the buying gets out of hand.
But unfortunately, I submit that the stock correction of 2015 (if it is really over) was no more than a pretend fire drill and it accomplished very little. Its short duration probably didn’t do enough to convince investors that the market is too high and that caution should be used when allocating money to high flying stocks. It was a warning sign but not a big enough one to seriously get people’s attentions and make them worry.
Because it cam and went so quickly, new investors still don’t have a clue about what it feels like to invest in a market that goes down for a prolonged period of time. That week after week, month after month feeling of helplessness that truly teaches what the risks are in stocks never happened and everyone got their money back way too fast!