After years of relative calm, equity markets have finally suffered their first correction since 2011, falling -12.4% from the May 21st highs (through August 25th) and snapping the third longest streak without such a correction in fifty years. Fears over slower growth in China, uncertainty around the timing of rate hikes and technical factors related to market positioning all played a role. But how unusual is this correction? As it turns out, not very; in 19 of the last 35 years, markets suffered a decline of 10% or more, and in all but two of those 35 years markets saw 5% declines or more. Importantly, we don’t see this correction as morphing into a full blown bear market; the U.S. economic data remains solid, commodity prices and inflation are low, and monetary policy will remain extremely accomodative, even if the Fed hikes rates. For investors, it is times like these that the power of diversification is on full display. During the 12.4% correction, a portfolio of 60% stocks, 40% bonds would have only suffered a drop of 7.8%.
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(Source: JP Morgan)
