On average there are 3.3 five percent corrections per year. 2017 was an odd year with record low volatility where there weren’t any corrections as stocks went up in almost a straight line. 2018 has been a return to the average as there have been 3 corrections so far. If you’re a long-term investor, it’s not a good idea to panic during every correction because most end quickly. You shouldn’t change your process based on small movements in stocks. If you don’t check your portfolio every minute normally, don’t start checking excessively because stocks are falling. Do macro, sector and company research and form a view. Downside market volatility could be a blessing or a curse, all that matters is your perspective. Here’s a good article (we think so) discussing the merits of reviewing macro, sector and/or company specific information in best determining and structuring your view of the world.
A correction is like the stock market testing to see if a recession is coming. Most of the time it ends up being a failed test which is why stocks rebound. This article will review some of the negative catalysts blamed for the October 2018 correction. Obviously, a new catalyst can steal the spotlight and cause a crash, but it’s still a good way to determine if this correction is about to turn into a bear market or not.
Housing Affordability
Housing market weakness is one of the most important negative catalysts for this correction. GDP growth is on pace to be 3.3% in Q3 after growing 4.2% in Q2. The unemployment rate is low, nominal wage growth is accelerating, and consumer sentiment is high. Even with that solid back drop, housing has been weak. This proves how unaffordable prices have become. This is the result of years of shelter CPI rising above the overall headline reading. Without shelter inflation, overall inflation would have been lower this cycle. The problem is shelter is the biggest cost consumers face.
