Every Correction is Healthy

There’s no better way to describe a correction in the stock market. For most investors who hold a number of long positions — it hurts!

At the end of the day, there isn’t much you can do about it. Even though there were other factors contributing to the latest drop in stock prices, I’m still amazed that the correction was precipitated by Chinese stock markets.

This is a milestone event in my mind, representing the early stages of a shift in global economic power. Fortunately, the Chinese marketplace has proven itself to be incredibly resilient, much like American equities have been for the last several decades.

Even though it hurts, a retrenchment in stock prices is a natural and healthy occurrence. An athlete can’t keep running at a high speed without a rest… he’d eventually collapse and not be able to get back up. The story’s the same with the stock market.

Large-cap stocks, in particular, have done incredibly well since July of last year. And you know things are going well in the stock market when mature companies like General Electric and IBM are rallying to new 52-week highs.

So, if you are a speculator with a portfolio of stocks, all you can do is ride out the current weakness. It could last for quite some time.

I’ve been calling for a correction, but I didn’t know what the catalyst might be. I thought it would have been the Federal Reserve.

If the current weakness in the stock market turns out to last for several months, I think this would be very healthy for the long- term direction of the market. We may yet get an interest rate reduction towards the end of the year. This action would most certainly be an appropriate catalyst to get the stock market going again.