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Stocks & Bonds

Is the Stock Market Correction Over?

Probably not. But you can take steps to prepare for more ups and downs.

Illustration by Pablo Bernasconi

Just when they think they're out of the woods, investors keep getting pummeled by a stock market that can't seem to make up its mind whether it's headed up or down. After reaching a high of 2873 in January, Standard & Poor's 500-stock index sank 10.2% through early February, putting the broad market index in official correction territory (defined as a drop of between 10% and 20% from the peak). The bellwether index recovered but failed to get back to its previous high before sinking back to the correction low point in early April. The S&P 500 has mounted an unconvincing rally since then, but it's often the case that just when investors start to think the worst is over, stocks experience another harrowing drop. So it's fair to ask: When will this correction be over?

See Also: How to Make Volatility Work for You

Not anytime soon. But no one can say for sure. Even if stocks claw their way back to the old high, we can expect another correction in short order, says Sam Stovall, chief investment strategist at market research firm CFRA. "We haven't done enough penance," he says. "If we do get back to breakeven, we will end up falling into another decline within this calendar year." In 40% of the years in which stock prices have declined 5% or more, there has been more than one pullback, he notes.

And the market still has plenty to worry about, including a trade war with China, a real war in Syria, rising interest rates and inflation that is starting to creep higher.

Recently, Wall Street insiders have been particularly worried about the bond market. Although yields on 10-year Treasury notes have crept higher, the gap between yields on long-term bonds and short-term securities has been shrinking, which can presage economic weakness.

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Strong underpinnings. For now, economic underpinnings are strong, and Kiplinger expects gross domestic product growth of 2.9% in 2018, up from 2.3% in 2017. Four out of five companies reported higher-than-expected profit growth as the first-quarter reporting season kicked off.

The most ominous sign for stocks might be that we're not worried enough. If the February decline was "the correction that scared nobody," says Doug Ramsey, chief investment officer of investment firm Leuthold Group, then the April downturn was "the retest through which investors contentedly snoozed." The bullish sentiment among market newsletter advisers and mutual fund market timers shows high levels of complacency, Ramsey says.

Given his outlook for corporate earnings growth in relation to the outlook for inflation, Stovall figures that the stock market remains overvalued by roughly 7%, auguring further price drops.

That doesn't mean that investors should cash out. The consequences of leaving even an aging, jittery bull market too early can be costly, says Jeffrey Kleintop, chief global investment strategist at Charles Schwab. Amid the rising volatility of late-stage bull markets, annualized gains average 19% in the two years prior to the onset of a bear market, he notes.

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You can manage market volatility with a diversified portfolio that holds domestic and international stocks and emphasizes sectors that tend to do well late in the game, including materials producers and processors, technology firms, and industrial companies. Health care stocks also are good buys now, Stovall says.

Above all, recognize that as the bull market continues into its 10th year, it still has a mind of its own. Says Ramsey: "The most complex bull market in history is not going to make a clean and decisive exit."

See Also: 7 Ways to Protect Your Nest Egg in a Volatile Stock Market