Market Buzz - A True Correction? Not Yet

The S&P TSX Composite index fell on Friday, recording its biggest weekly decline since early May. Markets were rattled by uncertainty about U.S. Federal Reserve’s interest-rate stance and by fears that Argentina’s debt default might signal broader instability.

Global markets sold off since the default by Argentina earlier this week, with geopolitical tensions exacerbating the negative sentiment. Market volatility has shot up in recent days as a result.

On the week, Toronto’s Main Index ended down 1.55%, but remains up 3.75% in the past three months and a sharp 11.7% year-to-date. Many of our clients immediately began asking if this is the correction many pundits have been calling for.

By definition, a correction is generally known as decline or downward movement of a stock, or a bond, or a commodity or market index of at least 10%. Many would agree that a true correction exceeds that amount. In short, corrections are significant price declines that stop or pause an upward trend – we are not there yet.

Are we headed in that direction? Perhaps – remember, anyone who tells you we are with absolute certainty, is full of it. There are been many 2-3 day periods in the current market bull that saw losses of 1.5-2.5% and none of them ended up producing a true correction.

If we do head down that path, we welcome it. We have recommended taking profits in a number of long-term winning small caps and hold significant cash positions that we would love to employ, but we remain discipline. If a correction materializes, investors will inevitably panic and sell some great stocks which will lead to long-term buying opportunities.

We recommend investors remember that summer volumes are light and reading too much into market pullbacks if often not a prudent idea. Holding cash to redeploy in the event of a true market correction is however prudent, particularly given the duration of the current upward move.

Having said all this, correction or not, there are still a number of select names we would buy right now with holding periods of 1-5 years. Over those periods, even a true correction can end up appearing like a small blip on a quality individual stocks’ long-term returns.

In the end, we have recommended investors take profits (partially in many quality Small-Caps) and continue to hold some cash in a high interest savings accounts given the strong and long upward trajectory the general market has been on. Nothing goes up in a straight line.

Take a deep breath and enjoy your long weekend!