Following my dad from one Air Force base to another, I lived in California, Thailand and the Philippine Islands as a child (among other places). In the seventh grade, I wrote an essay entitled “Ring of Fire” describing the plethora of active volcanoes and substantial earthquakes that occur in the Pacific Rim. When the earthquake centered on Louisa County, Virginia occurred in August of 2011, I immediately knew what was happening, and urged everyone in the office to go out into the parking lot and get away from the building. Although a little exciting, the earthquake had little effect on buildings in Great Falls, and the warm sunny day provided an opportunity to greet neighbors in adjoining offices.
As we have experienced the effects of what I believe will be classified as a “technical correction,” I am reminded of some of the same feelings I had earlier in my life during earth quakes. People lose their balance, lamps sway, and mirrors shift. Perhaps a few things fall off shelves…just like technical corrections!
Investopedia defines a technical correction as:
“A decrease in the market price of an asset or entire market after extensive price increases. A technical correction occurs even when there is no evidence that the increasing price trend should cease. It is often caused when investors temporarily slow down their purchases of securities, which commonly leads to a pullback toward a short-term support level.”
There is no firm specificity about how long or deep a “technical correction” stretches. I have suggested that they last between a few weeks to a couple of months, and somewhere between a 10% to 15% drop. Like major earthquakes (actual corrections of 20% lasting several quarters), one can get a queasy feeling when caught in the middle. Also, one may wonder if this is “another big one.” The “aftershocks” may last for weeks, or even a few months.
Although a number of factors will be cited for this volatility such as trouble in China, a poor domestic economic report, or Donald Trump having a bad hair day, generally this just provides an excuse for investors to recognize profits and reset basis in portfolios. I expect the US economy to continue to expand, unemployment to continue to drop, and the Federal Reserve to eventually raise interest rates. However, since one can never be sure if this is just some geologic rumbling (technical correction) or a precursor to “The Big One” (major sell-off into a bear market), it is always prudent to have a portfolio that is well balanced in non-correlated asset classes with significant tax efficient income. That is my prescription to mitigate both earthquakes and bear markets.