One thing making people nervous about stocks these days is the fact the U.S. market has gone more than two years without a correction, or a 10 percent drop.
The suspense is building because of presumptions that corrections are inevitable, even healthy, parts of bull markets. Are they? Maybe. But good luck trying to predict them.
“Investors and analysts of all shades and sizes are obsessed with the idea of a correction,” Birinyi Associates Inc., a money management and research firm led by Laszlo Birinyi, wrote in a note to clients. “We have always held that these efforts to foretell a correction are in vain.”
Birinyi autopsied 14 bull-market corrections since 1982 to look at what they shared in common.
First off, this bull market has already had more corrections than a rookie reporter. Besides the 2012 instance, there were two in 2011, a year full of sound and fury for stocks where the market ended up doing nothing, and one in 2010 around the peak of Greece’s debt crisis. That’s a total of four, the most of the six bull markets Birinyi analyzed.
There is usually one exceptionally bad day in the correction that accounts for about a quarter of the entire drop, Birinyi found, and it is more likely to occur toward the end of the correction. The “bad day” occurred in the final month of the retreat in half the instances studied.
There are remarkably few catalysts (six) that trigger corrections, according to Birinyi’s study, and none stem from traditional technical analysis. The most common reason cited is the U.S. economy, which was at least partially blamed for eight of the 14 corrections since 1982. Next was foreign economies, which were partially to blame for seven. U.S. politics were cited for four, while the Federal Reserve and interest rates for five.
Geopolitics and fundamentals, two potential catalysts regular invoked these days, only got partial blame for two and three corrections respectively, and neither has been a cause since 2002. As Birinyi echoed a point the firm first made seven years ago, “corrections are ‘event driven’ and are not organic.”
The suspense is building because of presumptions that corrections are inevitable, even healthy, parts of bull markets. Are they? Maybe. But good luck trying to predict them.
“Investors and analysts of all shades and sizes are obsessed with the idea of a correction,” Birinyi Associates Inc., a money management and research firm led by Laszlo Birinyi, wrote in a note to clients. “We have always held that these efforts to foretell a correction are in vain.”
Birinyi autopsied 14 bull-market corrections since 1982 to look at what they shared in common.
First off, this bull market has already had more corrections than a rookie reporter. Besides the 2012 instance, there were two in 2011, a year full of sound and fury for stocks where the market ended up doing nothing, and one in 2010 around the peak of Greece’s debt crisis. That’s a total of four, the most of the six bull markets Birinyi analyzed.
There is usually one exceptionally bad day in the correction that accounts for about a quarter of the entire drop, Birinyi found, and it is more likely to occur toward the end of the correction. The “bad day” occurred in the final month of the retreat in half the instances studied.
There are remarkably few catalysts (six) that trigger corrections, according to Birinyi’s study, and none stem from traditional technical analysis. The most common reason cited is the U.S. economy, which was at least partially blamed for eight of the 14 corrections since 1982. Next was foreign economies, which were partially to blame for seven. U.S. politics were cited for four, while the Federal Reserve and interest rates for five.
Geopolitics and fundamentals, two potential catalysts regular invoked these days, only got partial blame for two and three corrections respectively, and neither has been a cause since 2002. As Birinyi echoed a point the firm first made seven years ago, “corrections are ‘event driven’ and are not organic.”