Financial Strategies

Market corrections are healthy

Column by Patricia Kummer
Posted

Many investors are wondering when and how severe the next stock market correction will be. Those who have invested are worried, and those on the sidelines are waiting for an opportunity to buy on a dip.

The summer months can be slow due to low trading volume. This may cause the equities market to remain flat, or take a breather. Third-quarter earnings season is upon us, which will make it interesting to see how this summer pans out.

Some analysts are predicting a slower second half based on the fact that we were virtually reaching new market highs daily for the last four months. Others are basing their outlook on earnings and whether the lackluster growth in our economy can support the increase in stock prices.

The real reason for any fluctuation is usually a combination of factors, but there is always a catalyst that triggers the inevitable. The concerns over Europe and their potential recession along with China's disappointing exports could dampen the overall global economy, which also puts pressure on the United States.

All of these moving parts create a predicament for the Federal Reserve policy as well. Their original mandate to begin raising interest rates when unemployment dropped to current levels has some investors very nervous. Chairwoman Janet Yellen has indicated the tapering of the bond purchase program could end in October, which should pull some of the steam out of the market. Perhaps we are feeling these concerns starting to price themselves into the daily market fluctuations.

This quarter's earnings reports will push the markets in all directions. In the end you may notice not much movement due to the anticipation of these changes, combined with the slow summer months.

Wise investors know that market corrections create opportunities and are important to create a solid foundation to build from. Those sitting on the sidelines waiting for an opportunity to jump in will likely never feel the temperature is just right and could continue to miss out on opportunities.

The recent paltry market pull-backs we have experienced in the last three years are an indication that even with a small dip of 5 percent, many buyers waiting to get into the market are keeping a real correction (defined as 10 percent or more) from occurring.

If you are sitting on the fence waiting for a decline in stock prices, just ask yourself if the markets will be higher or lower 20 years in the future. Then act accordingly.

Consult your financial plan and update your goals and timeline to help you determine what assets are long-term. Then be ready as the summer months will likely give you a chance to put that money to work.

Patricia Kummer has been an independent Certified Financial Planner for 28 years and is president of Kummer Financial Strategies Inc., a Registered Investment Advisor in Highlands Ranch. Kummer Financial is a four-year 5280 Top Advisor. Visit www.kummerfinancial.com for more information or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice.