S&P 500 closed down 2.12%, Dow down 1.78%, Nasdaq down 2.88% and Russell down 2.46% on Thursday 2/17/22 so what does it mean?
It means we’re getting closer to a much needed market correction but how much does that need to be? At a minimum, we think the S&P is overvalued by at least 20% but because of built in market “circuit breakers” it is unlikely that we’ll see a steep decline anytime soon so here is a hypothetical playbook.
Over the next few weeks the market suffers attrition and bleeds down a half percent over the next few weeks until the Federal Reserve raises interest rates in which case we may have a “jolt” correction of 6% to 10% but how big the jolt depends on whether it’s a 25 basis point hike, a 50 or higher. The next FOMC meeting is scheduled for March 15-16 but there are other risks.
- War: Ukraine / Russia may send oil ballistic and markets tumbling up to 10% or more.
- Covid: A resurgence of infections may result in new lock down measures or remote work measures killing a nascent recovery for small business owners and others.
- Defaults: Argentina and Chile are experiencing massive inflation in the 50% range and defaults may set off a domino effect across Latin American that spills over globally.
- Black swan: A major earthquake, volcanic eruption, solar flare or other catastrophic event can occur that will shatter confidence in the economy.
- Housing crash: Our favorite Real Estate Youtuber Venture Consulting has been warning that 2022 may be the year the housing bubble finally pops.
- Political grandstanding – A shutdown of the US government over political grandstanding could lead to market corrections as well.
What’s a prudent investor to do? Stay vigilant, have a plan, and have a cash cushion to take advantage of the next market correction. Also note that there will be rallies so don’t get too overconfident that the worse is over until the economic landscape shows adequate correction. You don’t need to go all in at the first sign of the correction, just take small bites over weeks or months and build a good defensive portfolio.
Stay tuned and stay solvent…