The Dow Jones Industrial Average broke through the 20,000 barrier for the first time on January 25th, and prices have continued to increase.  Will new all time highs and a volatile political climate in Washington DC lead to stock market correction?

Stock market corrections occur regularly.  Each year since 1980, the stock market experienced a price decrease.  The smallest adjusment happened in 1995.  Prices dropped a modest 3%.  The largest correction accompanied the housing bust in 2008.  That year, the market dropped a whopping 48%.  On average, stock prices pull back just over 14% annually.

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Years without a noticeable price correction are the exception rather than the rule.

Years without a noticeable price correction are the exception rather than the rule.  Decreases of less than 6% have only happened three times in the past 37 years.  It really isn’t a matter of “if” a correction happens, but rather “when” it happens.  Unfortunately, nobody knows precisely when the adjustment starts or how far it will decline.

 

The impact of politics…

Politics dominates today’s headlines.  Our clients have expressed concern about the impact the new administration may have to the investment markets.  Unfortunately, there are no easy answers.  First, it takes several months for the federal government to make significant changes.  It takes even longer before the changes impact the bottom line of American businesses.

Please remember, you invest in companies. Those businesses find ways to be profitable in spite of the government.

Besides, the past thirty-seven years have shown the stock market is fairly agnostic to politics.  Both corrections and market gains occur no matter which party controls the oval office.  Therefore, investors shouldn’t change their expectations going forward.

 

The chart above represents the price decreases in the S&P 500 index and the annual calendar year total return for the index.  The S&P 500 is an unmanaged index.  Investors cannot buy shares of an index.  Past performance does not predict future results, and real life observations could be better or worse than what is shown.  This is not specific financial advice, tax advice, or legal advice.  Please consider all factors before investing.  The opinions expressed are those of Neal Watson.