The last week has brought a little turbulence to equity markets. In fact, July ended up being the first down month for the S&P 500 since January. Neither January nor July were big losses, but this month’s statement will be a move in the wrong direction for many equity investors.
At this point pulling back 5% from all-time highs should not be a big surprise. After all, equity markets have had an excellent run over the past year and a half. Interestingly, many blamed the poor market last Thursday (July 31st) on the following comment by Alan Greenspan: "The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction."
It’s funny that Dr. Greenspan still has so much influence years after his role as head of the Federal Reserve ended. However, what he said is absolutely true. Somewhere along the line there will be a significant correction. What no one knows is: 1) When will the correction come? and 2) What will it look like? We’ve been talking about what normal corrections look like for some time. A drop to around 14,600 on the Dow would be an average or "normal" 14.2% drawdown. We don’t see this coming in the short-term, but we wouldn’t be terribly surprised if it did.
The most important question is still: When the correction comes, what will we do about it? Many investors will want to just sell their stocks, bury their heads in the sand, and wait for the bear market to run its course. That’s just human nature.
Bottom Line: We don’t read too much into a few bad days. Stocks still seem close to fair value.
"Taxes and Technology”
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