Opportunity in corrections

Correction time – here we are.

At least, that’s what looks to be happening in the capital markets right now. We can talk about the reasons (Chinese initiatives to calm down its economy, currency controls in the emerging world, the European financial crisis heating up, again) – but it’s important to keep these corrective moves in perspective with recent gains.

Since the end of August, we’ve seen equity markets around the world rise anywhere from 15% to 20% (and from the beginning of July, some markets are up more than 30%, including the Chinese equity markets). Indeed, the S&P 500 rose in nine of the last 11 weeks while Shanghai was rallying for eight of those 11 weeks.

Commodities were also on a roll, rising more than 20% in the case of gold, copper and oil with even bigger increases for commodities such as cotton and sugar. The old story is “nothing goes up forever” and even if the big picture backdrop offered nothing but good news (which it isn’t), at least a “pause to refresh” would be in order.

So far, we’ve seen equities and commodities decline anywhere from 5% to 8% in the more mainstream markets. Is this normal? Yes, according to a recent report from Standard & Poor’s chief investment strategist Sam Stovall. Over the past 60+ years there have been 53 pullbacks and 18 corrections averaging declines of 7% and 14%, respectively. So we’re still well within the ball park.

Interestingly, this study also shows that pullbacks and corrections make up the lost ground on average within the next two to four months. If you don’t think this is the start of the next bear market (where all bets would be off), this might be the opportunity investors have been awaiting.

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