If you want to make correct investment decisions, you’ll do well not to get overly excited when you hear about a market “correction.”
“Correction” is a euphemism for a market falling at least 10 percent below its most recent high, and people on Wall Street and in much of the business news media make a big deal out of it.
Normally, I would rant about how if today’s lower price is “correct,” why aren’t we calling the previous, higher price a “mistake?” But instead, I’d like to talk about how paying attention to “correction” talk can lead to incorrect investment decisions.
The most recent example came just this week and involves the Nasdaq market.
The Nasdaq Composite index entered correction territory on Monday when several of its most influential stocks, especially Google, fell sharply because of noises emanating from Washington about possible antitrust action.
Let’s say you took entering “Correction Land” as some sort of investment guidance and decided to bail out before the Nasdaq entered dreaded “bear market” territory by falling at least 20 percent from its high.
If you bailed on the Nasdaq at Monday’s closing price, you missed the big bounce back on Tuesday and the decent gains on Wednesday and Thursday.
On Monday, the Nasdaq closed at 7,333, down 120 points on the day and 10.2 percent below its high in April. But on Tuesday, the Nasdaq rose 194 points, and rose more on Wednesday and Thursday. So by bailing out at Monday’s price, you’d have missed a 3.8 percent, three-day gain.
Another reason you should be wary of worrying about signals from the Nasdaq market is that the highly-volatile stocks of a mere four high-market-value companies have a disproportionate impact on the 2,663-stock Nasdaq index.
This leads the Nasdaq to be more volatile than broader market indicators like the Standard & Poor’s 500 and Wilshire 5000 indexes.
Shares of the four companies — Facebook, Apple, Amazon and Alphabet (formerly Google) — have a total weight of 24.6 percent in the Nasdaq Composite, but only 10.9 percent in the S&P 500 and 9.6 percent in the 3,618-stock Wilshire.
Hence the Nasdaq swings higher than the other indices when the Big Four fly high and falls more rapidly when the Big Four flail.
I can’t predict where the stock market goes from here — I don’t know, and nobody knows. One thing I do know, though, is that it’s easy and oh, so tempting to get caught up in Donald Trump’s tweets du jour or other short-term things.
But if you’re a nonprofessional investor (which I assume most of us are) and you want to own stocks or stock funds, you need to be reasonably calm, have financial and psychological staying power and not obsess over what, if anything, it means when the Nasdaq is in “correction” mode or when oil prices are in bear-market country.
Above all, don’t let talk of “corrections” lead you into incorrect decisions.
Follow-up: Last June, I wrote that I was hoping AT&T’s then-pending purchase of my former employer Time Warner would fall through even though I stood to make a lot of money if it was completed. (Which it was, and I did.)
One of the reasons I cited was that I thought Trump, who hates the way CNN covers him, might put enough pressure on AT&T (in which I have no financial stake) to induce it to sell CNN to another owner, most likely the Trump toadies at Fox.
People told me they thought I was worrying needlessly. Then came Trump’s call this week for a boycott of AT&T because it owns CNN.
I hope AT&T has enough corporate courage to leave CNN alone and let the journalists there do their jobs. But I’m more worried about AT&T dumping CNN for political reasons than I was a year ago. And I was worried then.
You may not like parts of what CNN does — and if I spent any serious time watching it, I’m sure I’d find things to grouse about. But I sure don’t want CNN’s owner to bow and scrape to the White House. Any more than I wanted Time Warner, CNN’s previous owner, to bow and scrape to Obama or Clinton or Bush I or Bush II.
I sure hope AT&T, which knew what it was getting into when it bought CNN with Trump already in the White House, does the right thing. And not the expedient thing.