The 'Pullback' Is Here
The 'pullback' is officially here... Is the long-awaited correction underway?... What to do if you're losing sleep
Today, the benchmark S&P 500 Index fell 4.1%...
That's its biggest one-day decline in six years, since August 2011. The blue-chip Dow Jones Industrial Average fell as much as 1,500 points before closing down 1,175.
This follows a similar decline last week that saw the three major market indexes shed as much as 4% through Friday. All told, U.S. markets have lost nearly 8% of their value over the past six trading sessions.
And if the Digest mailbag is any indication, some of you are already panicking.
We've received a flood of reader emails asking why stocks were "collapsing"... and why weren't we commenting on the "plummeting" stock market.
Oh boy...
Remember, we're long overdue for a correction...
As our colleague Dr. David "Doc" Eifrig has explained, the stock market has experienced a correction of 15% or more every 727 days – or about every other year – on average since 1950.
We've now gone more than 2,350 calendar days and counting... or more than three times longer than "normal."
But let's take a step back and put these moves in perspective...
An 8% decline in six days is relatively rare. But it's still only about half as much as we'd expect to see in a normal, healthy correction. In fact, what we've seen so far doesn't even qualify as a "correction." We're still only in "pullback" territory – defined as a decline of at least 5% from a high.
More important, this decline is just a small fraction of the huge 50% to 75% gains we've seen in these major indexes since the market bottomed in February 2016. Given the huge
Is this the start of that long-awaited correction?
We suspect it is... But there's simply no reliable way to know in advance. But we can be reasonably sure of one thing...
If you're among those losing sleep over the market, your portfolio is
You might be overcommitted to stocks in general... you might have too much exposure to certain sectors of the market... or you might have too much of your money in several individual stocks. If you're like many novice investors, it's probably all three.
If that's the case, we urge you to take some time tonight to re-evaluate your asset allocation and position-sizing strategies. And be sure to have a trailing stop loss – or another well-defined exit strategy – in place for every position you own.
And again, if you need more help building a well-balanced and diversified portfolio, we encourage you to learn more about our Stansberry Portfolio Solutions product. Click here for all the details.
Of course, being prepared to weather a correction isn't enough today...
If you're going to stay invested for the explosive final stages of the "Melt Up," you must be prepared to ride out several pullbacks along the way. As we've discussed, during the last Melt Up in the late 1990s, stocks experienced multiple corrections of 10% or more before the final peak.
Our colleague Steve Sjuggerud agrees. He shared his own research on the topic in this morning's edition of our free DailyWealth e-letter...
The simple truth is that stock markets have corrections. (Corrections are typically defined as a fall of 10% from new highs.) If you can't handle that, then don't invest.
The big question now is, could we see a correction during the current stock market Melt Up? Of course! But if we see a 10% correction during this Melt Up, would that mean the Melt Up is over? NO!
I say this so emphatically because of this fact: During the last great Melt Up in stocks – the dot-com boom of the late 1990s – the Nasdaq Composite Index actually saw five roughly 10% declines during its final push higher.
Take a look...
Steve noted that these corrections were all relatively quick...
They all played out in one month or less. But they were far from painless. And Steve believes this is an important lesson for anyone investing for the
A 10% fall in the broad index definitely meant larger declines in the more volatile stocks. During the worst of those corrections, you had to question if staying on board was the right move.
These days, folks are used to a one-way market... They will certainly panic in a correction.
My message today is DON'T PANIC. Corrections are normal – even in the Melt Up phase of a stock market boom. So please, don't be surprised if the market falls 10% this year. Based on history, it could even happen more than once.
The next correction will be painful. It will feel terrible. But don't panic. A correction (or two, or more) does not signal the end of the Melt Up.
How can he be so confident?
Simple: Because all of the key long-term indicators he follows continue to give the "all clear" for stocks. Regular readers know these include several critical market "vital signs," as well as the U.S. Treasury yield curve. But that's not all...
In a private e-mail this morning, Steve's senior analyst Brett Eversole shared another indicator that has proven to be incredibly effective at predicting market downturns. Here's what he told us...
When you talk about jobs, people are always focused on the unemployment rate. The general perception is that low unemployment is a good thing, and that a low unemployment rate is a sign of a healthy and strong economy.
But really, low unemployment – the kind we're seeing right now – can be predictive of a crash in the stock market. You don't want to fall into the trap of confusing the economy and the stock market.
In other words, according to Brett, a 'great' economy can often be a terrible sign for stocks...
And unemployment rates can actually be used to predict a broader decline. More from Brett...
Today's unemployment rate is 4.1%. That's the lowest we've seen since the dot-com era, when it bottomed at 3.8% in April 2000.
That was one month after the dot-com bubble burst. As we now know, the tech-heavy Nasdaq Composite Index went on to lose nearly 80% of its value.
Maybe you think that was a one-off event. But history says otherwise... Take a look at the following table. It shows how stocks performed over the past 70 years every time the unemployment rate was less than 4.5%...
| Unemployment Rate | One-Year Return |
|---|---|
| Less than 4.5% | 1.3% |
| All periods | 7.6% |
| Greater than 7% | 11.2% |
These numbers show an obvious conclusion...
Stocks tend to perform poorly when unemployment is at historic
But as Brett explained, the nominal unemployment rate isn't the only factor at play. It's when unemployment is low and then sharply rises that this measure is especially useful as a market indicator. According to Brett...
The unemployment rate has predicted the last three major U.S. stock market busts in 1990, 2000, and 2008.
But the unemployment rate itself isn't the indicator... What matters is the yearly percentage change in the unemployment rate.
A rising trend in the unemployment rate has predicted the last three big falls in stocks over the last 30 years. We really don't want to own stocks when unemployment is on the rise.
Importantly, the rate is still falling today. It fell 13% over the last year. So this indicator is not signaling a stock market peak... yet.
At some point, this will change. And when unemployment heads in the other direction – and quickly – it will be a big warning sign for stocks.
As always, we remind you that it's never wise to invest based on any one indicator alone. But as both Steve and Brett have explained, the weight of the evidence says it's not yet time to worry.
New 52-week highs (as of 2/2/18): CME Group (CME) and KraneShares E China Commercial Paper Fund (KCNY).
It wasn't all "worry" in the mailbag in this weekend. We also received some early feedback on Stansberry Portfolio Solutions... kudos
"Excellent kickoff to the new version of The Total Portfolio. I followed last year's portfolio and achieved
"I just got off the phone with Andrew from your customer support department. We discussed The Total Portfolio. He took the time to analyze my account and made me an offer I couldn't refuse! So now I am a Stansberry Alliance member – something I thought was way out of my reach.
"Thank you, Andrew, and thank you
"Porter, I don't remember how I found you and Steve in 1999, but I subscribed and added Doc when he came on board and have never left... My broker is constantly amazed at how well my portfolio has done in the good times and the bad, particularly by one who was a total novice to finance, past her 50s and just entering the workforce when she first began.
"I am so very grateful for all your teaching, the most important thing about your publications. Thank you for your time investing in educating as well as pointing your subscribers to sound investments. I frequently thank God for leading me to you!" – Paid-up subscriber Karen G.
"Dear Porter and Steve and company, you bet Steve has changed my life, but not just as an investor. His humanistic and honest approach to life as well as investing is what I have found so attractive. I learned a long time ago that money can (should) never be more important than people. As importantly, relationships based on trust, respect
"Hi Porter, I sure hope Steve and you enjoy the surfing. That is a flight back in time to your youth!
"I am also more than pleased to offer my comments about Steve and his investing techniques. I follow Steve
"Profits from his advice are not only giving me more and more financial
"To both Porter and Steve, I am inspired by you both! This is
"Retired now from my former careers (22 Army years, then 17 Cardiac RN years) and 13 years teaching as a contract instructor in helicopters teaching Army students... now you all are my teachers! Thanks again for what you do." – Paid-up Stansberry Alliance member Bob M.
"[Porter], I must admit I admire your relationship with Steve and enjoy hearing about it. I truly believe your best Stansberry Investor Hour to date is the recent one with Steve. You have simpatico together that's authentic.
"I'm a 56-year-old Alliance member for years, although I have recently had serious money to invest over the past 3-5 years. I've learned a lot from both you and Steve: Steve taught me more about investing, and you taught me more about business and life.
"I never traded bonds until Stansberry's Credit Opportunities and never bought China until Steve's True Wealth China Opportunities letter. I can't thank you both enough for the help and guidance you provide. I've made several hundred thousand of dollars in profits from you both. Now just don't screw up by keeping us in the market when the real crash comes (lol). I know you're going to say mind my stops... which I am." – Paid-up Stansberry Alliance member Charlie T.
Regards,
Justin Brill
Baltimore, Maryland
February 5, 2018