Negative Nellies Call for a Market Correction—Should You Listen?

The holiday season is officially upon us. Can you believe that Thanksgiving is this week—or that Christmas is only four weeks away? The year has certainly flown by, and there is plenty to celebrate over the next few weeks for many folks on Wall Street.

The broader indices have climbed impressively higher year-to-date, with the S&P 500 up 25%, the Dow up 18%, and the NASDAQ up 24%. Even the small-cap Russell 2000 rose 21% so far this year. Even more impressive is the stock market’s surge since the March 2020 lows: The S&P 500 jumped 110%, the Dow increased 94%, and the NASDAQ has soared 132%. The Russell 2000 rose 142%.

With the stock market already sitting at historically high levels, many wonder if a Santa Claus rally—or a year-end rally—will be in the cards this year. December is traditionally one of the strongest months for the stock market, especially in years like this one.

According to Bespoke Investment Group, 2021 marks the 10th time the S&P 500 has entered the final two months of the year with 20%+ gains since 1945. In the nine previous instances, the S&P 500 went on to post impressive gains in November and December. The average gain in November and December in these nine years was 6.01%.

November is already living up to this historical precedence, as the S&P 500 is up about 2% so far this month. So, in our opinion, there’s a strong likelihood that December will follow suit, and the S&P 500 could end 2021 at even higher levels.

Rather than enjoy this year-end strength, though, the “Negative Nellies” are out, claiming the year-end rally will only serve as a predecessor to the subsequent market correction.

Yahoo! Finance recently reported that one institutional investor is calling for a 15% to 20% correction in the early part of 2022. Eddie Ghabour of KeyAdvisors Group stated that the Federal Reserve’s plans to curtail its stimulus spending due to surging inflation and slowing U.S. economic growth could be the recipe for a market sell-off in 2022.[1]

Wells Fargo’s Chris Harvey concurs, anticipating a strong year-end rally will give way to a 10% market correction in the New Year. Harvey also noted that the Federal Reserve, slowing economic growth, and mid-term election uncertainty could ignite a selloff in 2022.[2]

A recent survey by Bankrate revealed that more than 50% of the analysts it surveyed are expecting at least a 10% market correction in 2022. Approximately 33% of these analysts stated the stock market is overdue for a correction—and it’s coming in the next six months.[3]

With predictions like that, there’s a strong likelihood that many investors will use year-end market strength to sell stocks and raise some cash to avoid the negative impact of a market correction next year. But before you follow these folks to the exits, consider this…

Market melt-ups can often negate the negative impact of a correction.

A market correction is often defined as a 10% to 20% decline. The most-recent market correction occurred in September 2020, when the S&P 500 slipped 10% from its intraday high of 3588.11 on September 2 to an intraday low of 3209.45 on September 24. The decline came on the heels of the S&P 500’s 60% surge off the March 2020 lows.

Typically, September is a weak month for the stock market. If investors were wary of an impending market correction in September 2020, given the market’s nearly straight-up rebound from the March 2020 lows, they were likely running for the exits at the end of August. But here’s what they would have missed: The S&P 500’s nearly 9% surge in the following two weeks.

You read that right; the S&P 500 almost wholly erased the early September correction in only two weeks. And then, the index went on to rally 16% from the September lows through year-end. So, all those folks who bailed ahead of or even during the September 2020 correction likely missed out on the tremendous gains from the subsequent market melt-up.

The reality is that if you have a financial plan—one tailored to your specific needs and financial goals—and have built your portfolio appropriately, you should never react to the “Negative Nellies” and make a knee-jerk change to your investments. It could end up being a costly mistake.

Your best course of action is always to develop, implement, and stick to your financial plan; while ignoring the chatter of the financial media and so-called financial experts.

If you’re concerned about a market correction in the New Year and are debating if your portfolio is well-positioned to weather any market bumpiness, give us a call at Nicollet Investment Management today. We’d be happy to review your current holdings and discuss your financial goals for 2022 and beyond.

Please click here for important disclosures.

[1] https://finance.yahoo.com/news/investor-fed-taper-slowing-growth-the-worst-equation-for-the-market-sees-15-correction-130500959.html

[2] https://www.cnbc.com/2021/10/31/market-is-melting-up-to-new-records-but-2022-looks-rough-wells-fargo.html

[3] https://www.bankrate.com/investing/market-mavens-survey-stock-market-correction-october-2021/