The market has reacted quickly to an overbought condition that has lasted since late September last year. The market just ended its longest time period without even a 3% pullback. Historically, it is not unusual to have as much as a 5% consolidation about three times a year. The amount of time since we have seen this type of action only adds to the fear and emotion.
Keep in mind that during this bull market we have had twelve 5-10% pullbacks since 2009. For example: In early 2016 the market fell about 13% over three weeks. It is interesting to note, that correction started from DJIA 17750. The market obviously recovered then and is now much higher. In August of 2015 we lost over 7% in just a week but, completely recovered over the next three months.
We believe patience will be rewarded again and remind you that emotional decisions are almost always proven wrong in hindsight. The underlying fundamentals remain strong. Corporate earnings are expected to grow by double digit percentages this year, interest rates have risen but, by a nominal amount which is justified by improving economic output, the economies around the world are improving simultaneously and valuations are still only slightly above the historical average. Tax reform will also act as a further stimulus and the repatriation of cash stockpiles overseas will encourage corporate capital expenditure to promote further growth.
Stay the course. We believe this correction is a normal consolidation of recent gains. The market just simply got ahead of itself in the short term. Intermediate to longer term, we remain bullish. Here are some interesting facts to consider.
When January is up, the market has ended the year higher 86.8% of the time since 1950. When January is up at least 4% as it was this year, the market has ended the year in the green 100% of the time. When the DJIA ends a year up 25% or more, the market ends the next year higher 8 out of 10 times with an average gain of 12.6%.