With the stock market's correction no longer a matter of if, some market watchers and financial advisers have taken to preaching a sense of calm as investors hunker down for a heretofore rare bout of volatility.
“We could argue that it is unusual to have this kind of correction all happen in a span of a few days, but there's really nothing unusual about having a stock market pullback,” said John Buckingham, chief investment officer at AFAM Capital.
The S&P 500 Index, which was down more than 2.5% in mid-day trading Tuesday, has gained 2.8% since bottoming out a week ago. But even at its current level, the benchmark is down 9.8% from its July 20 peak.
For investors who haven't experienced a pullback of 10% or more since 2011, the recent stock market ride has been a cold reminder of why stocks are generally considered long-term investments.
“This is a correction, but it's probably not the beginning of a bear market,” said David Spika, global investment strategist at GuideStone Funds.
“It generally takes a few months for the damage to be repaired, which includes some big down days followed by rallies and then legs back down,” he added. “It's very likely the market will retest the lows of last week.”
LOOKING FOR A RALLY
With history as his guide, Mr. Spika is looking out beyond the next few months of anticipated downward moves for stocks to a three-month rally period, during which “the market regains all the losses.”
For asset managers like Mr. Buckingham, the biggest challenge is knowing when to deploy the cash he has been building up. Across various separate account portfolios, he has increased cash allocations to between 5% and 8%, up from a typical allocation of less than 2%.
“There really aren't a lot of great options for investors, which is why I don't see this pullback extending out to a bear market,” Mr. Buckingham said. “Right now, we're licking our chops looking to use some of the cash we've accumulated.”
Among the unique features of the current correction is that it is happening when the Federal Reserve's unprecedented monetary policy has left investors with few valuable options beyond stocks.
In essence, after seven years of seeing the stock market chug steadily higher, investors keep mustering up the courage to either sit tight or buy low at every opportunity.
“There's clearly a lot of institutional skittishness, and the market is trying to have a correction, which is a path we started down last week,” said Steven Wruble, chief investment officer at RiskX Investments.
“There are a couple of wild cards in terms of what the Fed might do and there's even talk of more quantitative easing, and we are finally getting a more realistic view of China's economy,” he added. “But this is not the start of a massive bear market, even though we are flirting with correction territory, which is probably overdue.”
Expanding on the overdue theme, Dick Pfister, president and chief executive of AlphaCore Capital, said, “This is the kind of thing we've been waiting for.”
Mr. Pfister, who builds portfolios of alternative-strategy mutual funds for financial advisers, said the stock market downturn has helped alternative strategies shine by comparison, but any focus on alternative strategies also illustrates the extreme performance dispersion within the sub-categories.
“The rub on alternatives is that there's so much dispersion that you have to go in and make sure the funds are really doing what they say they're doing,” he added. “It's not impossible for an adviser to do the due diligence, but you have to go in with your eyes wide open and not follow the herd.”
Along those lines, he cited the Boston Partners Long-Short Equity Fund (BPLSX), which gained 2.75% in August, while the S&P 500 fell by 6.03%.
On a 12-month-trailing basis, the Boston Partners fund was down 8.4%, and in the 84th percentile of the long-short category.
“That's a fund that hadn't had a great 12-month history, but it was one of our best performers in August,” Mr. Pfister said.