Let me begin by defining what a correction is. A correction is defined as a pullback of 10% or more for an individual asset class – the S&P 500 (SPX), Gold, Bonds, etc. Bear markets are thought to commence when the correction is of the magnitude of over 20%. In general and on average, a correction occurs twice every three years. So, as you can see, it’s a common event. Some people define it as an intraday high to an intraday low. Others define it from a closing price to closing price. It’s really splitting hairs and more of an art than a science, to be honest. You might not recall, but last summer, we experienced a near correction in the SPX and a full-blow correction in the NASDAQ 100 (NDX). For the most part, these corrections overlapped one another. You might not feel the impact of those corrections, because the markets, even with the recent pullback, are higher than those levels of last summer.

We have even experienced a few bear markets in the stock markets, which occur on average once every six years. We had two recent bear markets, in 2020 (the Pandemic) and 2022 (extreme Fed tightening). You would have to go back to the financial crisis of 2007-09 for the prior bear market and then 2000-2002 for the bear market associated with the failure of the dot com boom.

Where Do we Now Stand?

As of last night’s close, the SPX was off from its recent high of 6.65% and the NDX was off by 9.64%. Understand that the NDX is a higher “Beta” index. Beta is the correlation between a stock or index and the SPX, which is the broad market index, for which most active managers compare their performance to. The Beta of the NDX is about 1.28 but can vary. So, we are approaching correction territory.

What Causes a Correction?

There are several causations of corrections. Here are a few:

1. FUNDAMENTAL VALUATION – merely stated, when stocks are overvalued on a typical method of price determination, then stocks must correct to bring prices back in line with a financial fair value. Sometimes stocks may overcorrect, but in the fullness of time, an equilibrium is achieved. This is why market analysis is so focused on earnings reports and management earnings guidance. I subscribe to this school of thought.

2. TECHNICAL ANALYSIS – this is a school of thought that relies on stock charts, volumes and their relationships to certain metrics such as moving averages or price formations such as “cups and handles.” Technicians look for breakouts for rising prices and breakdowns for declining prices. Many traders rely on these indications. I do respect their value as a tool but for me fundamental analysis is of greater importance.

3. ECONOMIC EVENTS – We are inundated with economic data points – Payrolls, unemployment rates, inflation data and commodity prices to name a few. A single bad data point can shock a market, but a bad series can drag markets into a correction – and the economy into a recession.

4. EXOGENOUS EVENTS – These are unexpected occurrences, natural or man-made. It could be a natural disaster, severe weather, war, terrorist attacks, etc.

What is Causing Current Market Weakness?

What started the ball rolling was a string of disappointing economic data in January and February – weak jobs numbers and “Sticky” inflation data. Understand that economic data is a backward-looking series of data. It is hard to fix those right away. However, the concerns are that worsening data will beget even worse data in the future is a risk. That likely put a top in the markets. Then we had a series of brutal wintry weather, all of which is well documented. While earnings reports for the 4^th quarter of 2024 were good, there were reasons for corporations to be less that ebullient in the near future. Then came fear of tariffs. While no major tariffs have been enacted so far, the fear that many nations will do so on their own or in reaction to those proposed by the Unted States have markets worried.

What To Do in a Pre-Correction or Correction Phase?

First, don’t panic. My friend Jim Cramer (best known from CNBC) has a saying that “no one ever made a dime by panicking.” He’s right. The reason is because panicking is an emotion. You need to be disciplined.

I have made it though many corrections over my years on Wall Street. When you are in the midst of one you feel like the walls are closing in on you and that the sky is falling. That’s what the smart institutional money managers want you to think to entice you to sell stocks at all costs so that they can buy them from you.

Next you must lighten up your positions. We call it warehousing dry powder for when the markets rebound. First get rid of losers. That always helps with taking losses against your built-in gains of larger positions. Also, scale back a few winners. Hey, you can always hope to buy back a quality stock at lower prices when the correction is over. As I write, our Growth Strategy accounts have on average about 14% in cash, our Dividend Strategy accounts have on average about 4% on hand and our Consumer Discretionary accounts also have about 4% cash on hand.

Also, you should reduce risk. This is why we encouraged our clients early this year to take those juicy profits in Growth Accounts from 2023-24 and reallocate some of the assets to a more conservative Dividend oriented approach. In doing so we swapped out of stocks with a portfolio Beta of around 1.55 to a portfolio Beta of around 0.8. There might have been a cost associated in doing so as it may have created some capital gains, but that might have been a good price to pay. Also, newer clients we have suggested dividing their assets between the two strategies to develop a bar-belled approach to the stock market. 

When Does a Pre-Correction or Correction Phase End?

There are many theories about that. Here is another list to consider:

1. A rally attempt succeeds. Typically we see the first rally attempt fail. Recall that this Wednesday the markets rallied nicely, only to fall even harder yesterday. We need to see at least two or three back-to-back rallies occur. This indicates that institutional investors see a buyable bottom.

2. Green shoots appear. Green shoots are when suddenly, some stocks stop going down and trade higher, albeit modestly to begin with. Soon the green shoots spread, and a market bottom is formed. Last night Broadcom (AVGO), one of the major AI Chip producers, reported a stellar quarter and provided robust guidance. That stock rallied significantly after hours. If AVGO can hold most of those gains, it would be considered a green shoot that could spread to other stocks.

3. An anti-exogenous event occurs. We say on Wall Street that a market climbs a “Wall of Worry.” There is plenty of worry going on, but what happens if some of that worry is taken off the table? Right now it may mean a cessation of hostilities between the Ukraine and Russia. The failure of the signing of the minerals agreement by the Ukraine devolved into an ugly spat in the Oval Office. It appears that the Ukraine has second thoughts and will sign the agreement after which President Trump will bring Putin and Russia to the bargaining table for a ceasefire. Also, the tariff threats amongst the US, Canada and Mexico might be resolved taking away the economic worries of an escalating tariff war. The Federal Reserve could step in and lower rates to calm financial markets.

Learn to embrace and not fear the unknown of corrections, because always when the clouds lift, things get better!

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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC  was long AVGO, QQQ & SPY, - although positions can change at any time. The mention of stocks are not recommendations and may not be suitable investments for your individual situation.

Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor. 

For more information on investing with LakeView Asset Management, LLC call us at 702-749-9343 or request more information by clicking on the contact button on the top right-hand corner of the website or by emailing Scott at scott@lakeviewasset.com or Carly at carly@lakeviewasset.com. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ

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