The past few newsletters have reminded us of the terrific rally we’ve enjoyed since September 2022, coming up on almost two years now. But the market, as the market regularly does, has contracted during the past few weeks, dropping from between 4% and 7%.

As I write this newsletter the market is having a strong up day. So, is this the market rebound that goes on to another new high, or is this contraction bound to continue after today’s bounce?

Of course, no one knows the answer to this question. But whether we are in the beginning of a correction period or whether the next correction is still down the road a bit, this is a good time for a lifeboat drill.

Long-time clients and readers will recognize that I’ve written about lifeboat drills several times in the past, but it can’t hurt to be reminded.

If you were embarking on a cruise today, the crew, before embarking, would be reminding all passengers about what happens in case of emergency. Passengers are reminded before embarking because it would be too late to do so after an emergency occurs.

In the same way, I’m reminding all of us that markets go down after they’ve gone up for a while (and, vice versa, they go up after they’ve been down a while). Normal corrections of 10-15% happen at least once per year, typically. We had a normal correction during the summer of 2023, while in the midst of this rally.

Normal corrections usually don’t last very long. The summer 2023 correction lasted just three months, for example.

There are only two correct behaviors for investors to engage in during a correction period: (1) exhibit patience, knowing that the correction will pass soon enough; and (2) add to your existing positions, if you have available cash to invest.

It is natural to be dismayed that your account balances have dropped from their previous highs, but it would be incorrect investor behavior to turn dismay into panic by selling your shares at these new lower prices.

(This is not to say that rebalancing from one position to another is wrong. Corrections often result in a change in market leadership, with a new sector taking over and the previous leading sector taking a back seat. So, changing an investment position is okay, but withdrawing from the market out of fear of what will happen next is not okay.)

I raise this lifeboat drill at this time even though I don’t know if this market contraction will turn into a normal correction because if it doesn’t maybe the next one will, or the next one. It is inevitable that there will be a next correction, so now is a good time to prepare yourself for this event by remembering that declines have always been a temporary hiccup in the long-term climb of a market that ultimately reflects long-term growth of the economy.

Until next month, JR