Why a Market Correction Can Be Healthy: Market Commentary from Cabana’s CEO – January 11, 2022

1 week ago

  • Share this:

Just before Christmas we wrote a commentary suggesting that the easy low volatility investing might be coming to an end after more than a year of the broad equity indices moving up without a correction of more than 5%. Not only is such an unabated move up highly unusual, but it is not particularly healthy either (in my opinion). I suggested then that despite a probable bounce from oversold conditions, markets appeared over the coming weeks to be headed for a test of support levels formed during the spring and summer. These levels coincide with the Dow, S&P 500 and Nasdaq’s 200-day moving average – and where the rubber meets the road between bull and bear markets.  

Well, we got the bounce and then a big-time resumption of December’s pullback. As of yesterday, in the span of the four market days, the benchmark S&P 500 had dropped more than 3% percent and the Nasdaq dropped a whopping 5%. The Nasdaq now officially entered correction territory with a 10% fall from November highs. The reasons given are that inflation is running rampant, the Fed will be forced to raise interest rates, the Omicron variant is decimating the United States and the sky is falling (according to chicken little!). Like all things bantered about, I believe there is some truth to be found in all of this… other than the sky falling part. Yes, inflation is running hot, the Fed is going to take off the training wheels and begin to normalize monetary policy, and Omicron is spreading like wildfire around the country. Now for the rest of the story as I see it… 

We have inflation because people want to buy things and we don’t have enough of those things. The reason there is not enough is due to supply chain disruption (which is by all accounts temporary) and the simple fact that the world is moving forward and growing. Interest rates are rising because the economy is getting healthy. Unemployment is falling and wages are climbing. Rising interest rates are evidence of underlying economic strength, not weakness. Omicron is all over the place, but the idea that COVID is going to shut down anything is long gone. People certainly seem finished with putting their lives on hold. If you don’t believe me, look at the numbers of people who flew on airplanes this holiday season. More than the number that flew in 2019, and that is accounting for all the flights canceled this year.  

Ok, enough of that. Back to the correction we are seeing. Corrections can be healthy because they coincide with money moving from overbought sectors to other out-of-favor sectors. This is often how new technologies and industries are developed in the first place. The money that supports those new companies’ growth and innovation has to come from somewhere. It often comes from money leaving another investment. It is a zero-sum game, folks. This week we have seen a big rotation out of technology and into beaten down areas of the market, like industrials, financials, and even good old staples. Isn’t that a good thing? Shouldn’t those areas be afforded some investment dollars to innovate and improve their businesses? They create jobs and add value to our society just like Amazon and Apple and Netflix. Does that mean that Amazon and Apple and Netflix are any less important or viable? Of course not. It just means that investment dollars are being redeployed. It is this process that creates depth and strength in our economy. It is why the “stock market” has been higher for every rolling 20-year period since the inception of this country. It is the corrections that lead to our reinvestment in ourselves. Think of it like an NFL team. If all your money goes to the quarterback and middle linebacker (even if it is Tom Brady or Drew Brees) and nothing is left to hire talent at the other twenty positions plus kickers, your team is eventually going to fail. The quarterback needs somebody to throw to. He needs a running back to keep the defense honest. He needs a left tackle to protect him. The linebacker needs a solid secondary behind him and a defensive line in front of him. Think of a market correction as being the GM of the team, taking some money from the quarterback and linebacker and using it to hire some of the other important positions. Guess what happens then? The team gets stronger and sometimes wins a Super Bowl. Then what? The whole team gets a raise. That is why corrections are good and the stock market generally goes up over time. 

Disclaimers

February 23, 2021

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

The COVID-19 health epidemic has had substantial global economic impact on financial markets. As of March of 2020, restrictions to travel and business spanning the economy for activities not deemed essential have been imposed throughout the United States. These restrictions have caused unprecedented volatility and uncertainty in capital markets and have negatively impacted the economy. It is unknown how severe the impact to the economy and capital markets will be if the epidemic persists for an extended period of time. The epidemic may have a material adverse impact on Cabana’s investment advisory business including, but not limited to, the performance of our portfolio strategies.  

For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/.