No Corrections In 2021?

Recently the S&P 500 has stayed near its record high, while the median stocks hasn’t done as well. Sometimes this means a correction is coming; other times it means the median stock is oversold. Factor analysis is difficult because correlations change. It’s not a good idea to buy a stock only because it’s correlated with a factor. Imagine buying a growth stock correctly anticipating the rotation we’ve in the past few weeks only to see it fall.

There is more to investing than fitting stocks in buckets. When stocks change categories, they tend to fall more than they would ordinally because the investor base shifts. However, the underlying business doesn’t have any relationship which who owns it. Most CEOs don’t know what factor style their business is in. True business owners look at valuations and fundamentals, shirking the factors.

We are discussing factors because it affects the S&P 500 more than it has in the past. The large-cap tech companies have taken over the index. If they increase, the index is likely to increase too. The difference between the Dow and the S&P 500 has become stark. Therefore, the analysis above might not hold as much weight as it typically does. As you can see, the S&P 500 has averaged a 10% correction in the 2nd year of bull markets. The smallest correction was 5.1%. The current largest correction of the year is 4.1%.

Since the market is near its high, it needs to start over again to get close to the average. While corrections are common in bull markets, this might be different from other 2nd-year bull runs because the large-cap tech stocks aren’t that cyclical. Keep in mind, that the larger they get, the more cyclical they become. That’s the nature of controlling a large portion of GDP. We aren’t saying a 10% correction won’t happen in the next 6 months. Instead, we are saying the economy might not be the catalyst for such a correction.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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