Between US midterm elections and the Fed ushering in QE2, one significant event was absent from headlines—the stock market correction that began in April 2010 officially ended. Plunging markets and forecasting doom draws readers. But you'll hear nary a mea culpa when things turn out just fine.
Stock market corrections, by nature, are short, sharp, steep, and come out of nowhere. There's no timing them because as soon as they come, they're gone. Corrections are sparked by a scary story, which at the time seems like it will be the downfall of the global economy, but fades from view just a few months later (Y2K in 2000, Asian Financial crisis/Long Term Capital Management/ruble crisis in 1998). This scenario should sound very familiar to investors in 2010.
Both corrections this year (that's right, this is the second correction the stock market has powered through) were sparked by PIIGS fears (now largely irrelevant). The bigger and most recent correction kicked off as PIIGS hysteria reached a fever pitch heading in to the summer of 2010. A sovereign default contagion was thought to be underway. The downfall of the eurozone was imminent—and from there? Global financial crisis and recession take two.
As the media and politicians worldwide feasted on PIIGS fears, sentiment and stock markets nosedived. But with a massive (and mostly unused) bailout package in place, the PIIGS (except Greece) successfully obtained funding on markets and reality, not default dominoes, set in. It turned out the issues in the PIIGS countries were serious, but not enough to cause the feared global default contagion. In nearly classic correction form, the MSCI World and S&P 500 rapidly returned to pre-correction highs virtually unsung. And equally unheralded, the S&P 500 and MSCI World are back in positive territory for 2010. In fact, other than the PIIGS, every country in the MSCI ACWI Index (the MSCI World plus Emerging Markets) is positive for the year.
Corrections are the classic challenge bull markets present investors. They're the head fakes that knock off the froth—uncomfortable, but long-term are healthy for stocks. Without the occasional worry, investors can become euphoric and that's a risky environment for stocks. But ultimately, it's better to stick it out in the market than risk getting whipsawed.
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