investors not used to corrections anymore
Investors seem not used anymore to corrections in the market and many get nervous currently when one seems underway. This year the markets have been very chilled and the only way was up. That has been the case since the end of 2023, when the S&P started a strong rally mostly driven by Tech and AI stocks: the Nasdaq. As always people get used to the ongoing upticks and now many seem to get nervous on the possible start of a healthy correction in the markets. A correction that is still very small looking at the rally we have experienced over the last 9 months.
So what are we witnessing at the moment? Over the last few weeks we have seen Tech and Growth stocks being weak. Especially weak versus the small and midcap stocks. Since last year small and midcaps had a small rally only compared to tech stocks. See below the Russell 2000.
small caps very strong lately
Inflation had been high for a while over the last few years. This led to an increase in interest rates which normally does not work at all for small and midcaps. These companies are more risky for banks to loan money to and often pay a premium upon the normal interest rate. They often pay 8%+ on loans and the interest rate costs are a large part of their overall costs. With the likelihood of rates to come off soon in the US, these stocks got a boost as their costs will likely decline in the future which will have a strong impact on the profitability.
Big tech in the US has over the last years started to make strong amounts of cash and also finds it rather easy to attract new cash when needed via stock offerings, bonds or loans. No one wants to miss the AI train and many folks where happy to invest some in the popular names. That optimism has been strong and now gets a small setback. Whatever the exact reason is, geopolitics regarding the chip industry and a cooling down economy in the US seem to call a (small) halt to the enduring optimism in the overall stock market, and lately mostly affecting the big tech names.
Corrections are often profitable for the investor
On average, the S&P returns around 8-9%. Generally a great strategy is to buy stocks every month. For example with a part of your salary. And to never sell most of the portfolio. As Buffett says: “the ideal holding period is forever”. And corrections often bring new opportunities to invest. Stocks also are a great hedge for inflation over the long run. One should not fear corrections or crashes, and should not try to time them as that is normally more costly than the crash itself. Corrections now and then throw ‘good’ companies out with the bathwater.
The upcoming period, especially if equities can be dragged a bit more lower, will bring these strong opportunities everyone is always looking for. You will find out some of those in our stock newsletter.
