The greatest danger to investors is complacency. It is usually when investors are most complacent that they are blind sided when a real market correction takes hold and their portfolios take a hit. I am using the word complacent because that is exactly the sentiment that the majority feel about the markets at this time as only 17.5% have a bearish bias according to Investor Intelligence Survey Percent Bears.
Since 2012, the largest correction the markets have experienced has been a -10.4% move lower in the S&P 500, and the largest pullback since 2013 has only been -7.3%. Each pullback has the Federal Reserve assuring investors that more Quantitative Easing (QE) tools are available at their disposal. The chart below shows the market pullbacks since 2012 and the amount of QE that was being issued during that time.
Since 2012, the largest correction the markets have experienced has been a -10.4% move lower in the S&P 500, and the largest pullback since 2013 has only been -7.3%. Each pullback has the Federal Reserve assuring investors that more Quantitative Easing (QE) tools are available at their disposal. The chart below shows the market pullbacks since 2012 and the amount of QE that was being issued during that time.
Notice that in 2012 when we were running single QE of $45 billion per month the corrections were -10.4% and -9.1%. In 2013 when the fed increased the stimulus package and was running double QE, or $85 billion per month compared to $45 billion per month in 2012, the pullbacks only averaged around -5%. Is there a correlation between the extent a market pulls back and the amount of QE that is being issued at that time? Or is it just a matter of investors feeling assured that the Federal Reserve has their backs, and that buying the market dips regardless was the plan.
So, fast forward to the present. The QE has been tapered down from the peak of $85 billion per month in December of 2013, to currently $55 billion starting in April. Essentially it's QE in reverse. Below is a chart showing just how far down a market correction of say, -15% to -20% could take the market to.
The chart above only shows the maximum correction of up to -20% that I chose to display, which historically is a healthy market correction, but we potentially could expect something more severe than that, or even a bear market, which is more than -20%. With readings so complacent, (per the Investors Intelligence Survey Bears of only 17.5% being bearish) are investor portfolios positioned for the possibility of a market correction of up to -20%? Tough question to answer.
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