Thought of the Week

1. THOUGHT FOR THE WEEK
Corrections Are Not Predictable
SYNOPSIS
• Several market participants believe
that a correction in the equity market
is imminent, solely because we have
not experienced one in over two years.
• Corrections are regular and healthy
components of equity markets,
but the notion that they occur on
a regular basis is incorrect. History
proves that they are far less prevalent
during bull markets.
• These dips in equity prices are
completely unpredictable, and
investors who are waiting for a
correction as an entry point could end
up watching the S&P 500 continue to
climb higher.
THE HISTORY OF CORRECTIONS
A correction in equity prices is defined as a 10% –
20% decline, and they are generally considered to be
healthy stages in a rising market because stocks often
get ahead of themselves fueled on excessive investor
enthusiasm. These “cooling off” periods allow the
broader market to reset to a more appropriate level,
given current economic growth.
The prevailing belief across most media outlets and
market pundits is that a correction in equity prices is
looming simply because we have not experienced one
in over two years. These parties use history as a guide
to show that equity markets usually see a correction
once every 18 months. However, the Investment
Committee strongly believes that the data do not
support this notion.
We conducted research this week to dig deeper into
the frequency of corrections using data from Dow
Jones, Morningstar, and Bloomberg. Here are three
interesting conclusions:
1. Corrections Are Not Consistent: Since the end of
World War II, there have been 27 corrections of
10% or more, and only 12 bear markets (losses of
20%+). Although this does equate to about one
every 20 months, they are not spaced out evenly.
Nearly 50% of the corrections occurred during the
last two bear market decades (1970s and 2000s).
2. They Don’t Last Long: The average decline during
these 27 time periods has been 13.3% and took an
average of three months to play out.
3. Bull Markets Are Different: From the beginning of the
last secular bull market in 1982 through the 1987
crash, there was just one correction of 10% or
more. Between the Crash of 1987 and the secular
bull market’s peak in March 2000, there were just
two corrections. Simply put, secular bull markets
can run for a long time without a correction!
NOTE: The term “secular” refers to a time period of a
decade or longer. Secular bull/bear markets come and
go as part of the broader economic cycle, and the last
secular bull market ended 15 years ago with the dot-com
crash.
The chart below is an extension of the third conclusion
above and shows that during the last secular bull
market, the S&P 500 went close to eight years without
a correction (way longer than the prevailing belief that
one must happen every 18 months).
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com

2. THOUGHT FOR THE WEEK
The red lines on the left indicate the first correction in
our time series. The next correction did not occur until
1998, due to the currency crisis in Asia that took the
S&P 500 down almost 20%. Also notice that just as
we have seen a few pullbacks over the past two years,
the 1990s experienced similar activity with a few 5%
- 10% drops along the way. This slow and steady move
up is indicative of a secular bull market, where equity
prices rise over a period of a decade or more.
The Investment Committee strongly believes that we
are in the early innings of a new secular bull market,
and we anticipate a similar path up in equity prices
over the coming years. However, since we have not
seen this pattern in equity prices for close to twenty
years, investors have become accustomed to seeing
corrections far more frequently.
Simply put, there is no historical precedence to support
the notion that a correction is looming right now for the
sole reason that we have not experienced one in a while.
IMPLICATIONS FOR INVESTORS
Those who believe that a correction is right around
the corner have recently pointed to the spike in
volatility over the past three weeks as yet another
potential catalyst.
Most of this panic-induced selling has come from
traders worried over geopolitical issues and the
potential for interest rates to rise sooner than expected.
As strange as it may seem, the Investment Committee
actually welcomes this rise in volatility with open arms.
Volatility allows investors to build positions as short-term
traders sell due to fears that are irrelevant to long-term
holders. For example, geopolitical issues are almost
always buying opportunities because these events are
never strong enough to derail an economy (even the
terrorist attacks during September 11, 2001, did not
keep equities down for an extended period of time).
Furthermore, rising interest rates may be bad for traders
that attempt to profit from short-term moves in equities,
but they are great for investors because rising rates
during periods of controlled inflation indicate that our
economy continues to get stronger at a healthy pace.
There is no question that risks exist in our economy,
and any one of these risks could spark a correction if
fear ultimately overpowers logic. However, given that
we see a very low chance of a recession in the coming
years and equity valuations are not excessive, it may
also be some time until we see the next correction.
NOTE: Last week’s Thought of the Week discussed
why timing a correction as an entry point is highly
ineffective because they are impossible to predict.
Those who have been waiting to buy at a lower price
have been forced to watch the S&P 500 do nothing but
go up close to 40% since the last correction.
The bottom line is that the Investment Committee
is not making a call that a correction will or will not
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com

3. THOUGHT FOR THE WEEK
happen in the coming months because there are no
crystal balls in this business. Rather, we present this
data to our investors to make the point that a correction
does not have to happen simply because one has not
happened in a while.
We remain focused on the strengthening
fundamentals in our economy and seeking
investments in companies that have the potential to
consistently grow their earnings.
Sincerely,
Mike Sorrentino, CFA
Chief Strategist, Aviance Capital Management
This commentary is not intended as investment advice or an investment recommendation. It is solely the
opinion of our investment managers at the time of writing. Nothing in the commentary should be construed as a
solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities,
such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered
Investment Adviser.
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com