Why This Correction Is Painful for Investors
The correction in equity markets across the globe in recent weeks has left everyone wondering what led to such a sudden drop. Although there have been calls for a correction for quite some time, the sheer depth and pace of the correction surprised investors. Observing the fund flows into domestic equity ETFs in January, most of the cash was deployed into low-cost and market-based ETFs. An impressive $13.6 billion was pumped into the SPDR S&P 500 ETF (SPY) during January, followed by the iShares Core S&P 500 ETF (IVV) and the iShares Core MSCI Emerging Markets ETF (IEMG) with inflows of $6.3 billion and $3.2 billion respectively. A 10% drop across the indexes has caught late entrants in a tough spot. Investors hope that things will turn around quickly.
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Why is this correction painful?
This correction is painful because it’s impacting all of the sectors and asset classes. Investors don’t have anywhere to hide. The usual asset classes, like gold (GLD) and bonds (BND) that come to the rescue in times of uncertainty, have also declined along with the equity markets The sudden rush of selling has left investors with little time to prepare. Most investors are either closing out in a panic or waiting for a recovery.
What to look forward to?
In an investment research article, Goldman Sachs partly blamed robot-driven investment strategies, which could have sold aggressively, for causing such a steep drop. Goldman Sachs came out with a research piece claiming that the average correction (losses more than 10% but less than 20%) usually lasts for 16 weeks and leads to a drop of 13%. If history repeats itself, there could be some more pain before we see some recovery. Will investors who supported markets in January wait with patience, leave, or come back again?