Monday, May 31, 2010

Putting the Market into Perspective

May was a topsy-turvy month for the stock market, with the emphasis on the turvy. Although the S&P 500 finished last week’s wild ride with a tiny gain, it lost nearly 9% on the month (the stock market isn’t open today). That is the worst monthly loss since February of last year.A

A decline of this size officially qualifies as a “correction.” Here is a more precise definition:

Stock market correction is usually when the stock market, usually the Dow Jones Industrial Average, declines 10% or less in a relatively short period of time….A stock market correction can help the stock market catch its breath and hit even higher peaks.”B

Yes, well, maybe. All bear markets start out as market corrections, and we won’t know for several months which one we’re dealing with at the moment. But for what it’s worth, if one subscribes to Millard’s axiom that markets always overdo their movements regardless of the direction, I’d say we had this coming. That’s because the recovery moved with breathtaking speed and force.

In other words, we overdid the recovery, so it was time for a correction. But then, if Millard’s axiom holds true, we will overdo the correction as well. But hey, what do I know? About as much as anyone else, which is to say, not much at all.

Now here’s a thought that puts this conversation in its proper perspective: Today is Memorial Day. Generations of gallant young men and women have paid the ultimate price so that we can live in a free and open society. Let’s not waste too much of this precious life talking about market corrections.

Have a great week.

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