Alternatively, we could argue that we were “due” for a correction because of how far the market had run. On average, since 1950, the percentage gain from the bottom of a correction has been 49.8%, ranging from a spectacular 233.9%, in the run from 1990 to 1997, to a wimpy 12.9% in 2015. Importantly, the standard deviation around this gain has been 42.5%. 

Again, if the stock market behaved like haircuts, then once the market had advanced 49.8% from its low, it would have a correction. 

49.8%, that is, with a standard deviation of zero. 

If the stock market behaved like a roulette wheel, then the observed standard deviation on gains from lows would be 49.8%. The fact that it has actually been 42.5%, or 86% of the predicted “roulette wheel” result, suggests that the timing of corrections is even more independent of how far it has run thus far. Even less like a haircut and more like a roulette wheel.

So, in late September of 2021, we really can’t say we are “due” for a stock market correction because of the length or strength of the stock market run of the last 18 months. However, unlike roulette, there are very important fundamental forces that determine the behavior of markets over time and the week ahead will provide significant information on these forces. 

• The pandemic still dominates the investment environment with an average of 2,000 people dying every day from the coronavirus. Thankfully, the number of new cases and hospitalizations appear to have peaked but there is real uncertainty about how fast they will come down from here.

• On fiscal policy, Democrats will be scrambling this week to try to assemble votes to pass both the reconciliation bill and the infrastructure bill, as well as an increase in the debt ceiling and a continuing resolution to keep the government open past September 30.  In theory, there is a path to do all of this, but it is a narrow path, strewn with land mines, and Wall Street will have every reason to worry about a misstep.

• On the economic front, we expect to get generally downbeat economic data on housing this week although numbers on unemployment claims will likely be examined most closely to see if the labor market is continuing to tighten. 

• Finally, the Federal Reserve holds its sixth FOMC meeting of the year this week. Given the uncertainty about the pandemic, fiscal policy and economic data, it seems unlikely that they will make any significant announcement. However, their statement, their economic forecasts and Chairman Powell’s press conference will all be scrutinized for hints about when the Fed will begin to taper its bond purchases and the likely pace of that reduction. For the record, we still expect a November FOMC announcement of tapering to begin in December, with bond purchases falling by $15 billion per month.

For investors, it is a complicated picture and one that requires balanced judgment. We cannot depend on any simple rules to determine the timing of the next correction. In addition, there is unusually high uncertainty about fundamentals due to the unpredictable nature of the pandemic, high-stakes political negotiations in Washington and the unusual forces both powering and impeding an economic recovery, as we adapt to, or move on from, the pandemic.