The Latest Market Correction: Growing Pains for a New Bull Market?


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September 8, 2020

 

 

AFTER MONTHS OF STEADY GAINS, the Dow Jones Industrial Average dropped by more than 800 points last Thursday.1 Technology stocks, which had helped propel the markets to new heights, saw some of the biggest declines.

Yet while volatility could persist in the short term, “investors should not assume the onset of a new bear market,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “In fact, we view the correction as a much-needed and even healthy development in the early stages of an extended bull market.”

“We view the correction as a much-needed and even healthy development in the early stages of an extended bull market.” —Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

Here’s our take on what this may mean.

The correction didn’t come in response to any major headline, catalyst or policy-induced concern, Hyzy points out. Rather, the selling likely represents an “exhale” by investors worried that markets could lose momentum after the strongest month of August in about 30 years, according to the Chief Investment Office (CIO). “Today, these exhales are much quicker and sharper, given the size and high impact of machine-led algorithms and model-driven trading programs,” Hyzy explains.

Despite the challenges of an ongoing pandemic marked by business disruptions and job losses, Hyzy believes the fundamentals for recovery remain strong. He points in particular to a healthy housing market, as well as technology and health care companies (current volatility notwithstanding) that could likely continue to benefit from strong demand. Hyzy expects the markets to begin to stabilize in the coming week. Looking ahead, he believes, momentum could resume through year end, driven in part by current better than expected corporate profits.

What can investors consider doing right now?

“The best guidance is to stay the course,” Hyzy believes. In other words, avoid abandoning stocks, even if short-term drops feel unsettling. While bonds remain an important part of a portfolio, stocks continue to offer the best opportunity for long-term growth, he believes. Investors should focus on diversifying their holdings and rebalancing regularly after periods of volatility.

For a deeper dive on current market conditions, read the CIO’s latest Capital Market Outlook report and tune in to the latest Merrill CIO Audiocast.