Leading up to the holidays we have experienced some pretty big price adjustments in stock prices. How big, how about 19.3% between September 28th and December 24th! Most investors are asking what caused the sudden correction? For starters, the market was in retrospect a little expensive selling at a 4% premium to its 25-year average. On that note, there are enough investors out there that are constantly watching these benchmark measures and use them as signals to buy and sell.
Institutional traders with great access to extremely large pools of low-cost capital can make acceptable returns on small gains per trade given enough volume. When the incremental return shrinks the number of institutional investors and their volume tends to shrink as well. When The Federal Reserve Chairman sounds more hawkish on interest rate increases, that can become a (or one of the) catalyst(s) to broad-based selling. The implication here would be corporate profit margins would be penalized with higher interest rates. Falling oil or natural prices could suggest a weakness in demand. However, it could also be a surplus of supply due to improvements in exploration science and technology (fracking as an example) and a little luck. The potential trade war over tariff’s with China argument at this point hasn’t become an economic disaster yet but fear of poor meeting between the U.S. and Chinese negotiators could have been a factor as well in the selloff.
The good news is that a lot of great companies got very inexpensive during the downdraft. The 1000 and 500 point day moves to the upside say to me that today’s market pricing is a compelling entry point for many value-conscious investors. A little more research on the buying volume and size of individual trades will give us more insight. Investing is still about accepting some risk for various levels of return. Market corrections act as a leveling device.