Early Warning Signal

Investors have become increasingly focused on volatility in recent years. When stock prices rise, volatility typically holds steady or drifts lower. And when stock prices fall, volatility typically spikes higher. The shifts between stock prices and volatility almost always happen simultaneously. But another indicator can be useful in helping to predict these shifts in stock prices and volatility weeks to months in advance.

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What Now?

It was a rough stretch to close out the week. It started on Thursday with a -1.54% drop on the S&P 500 Index, which was its worst day in three months and the second largest daily decline in over a year. The downside continued on Friday, albeit modestly, as the customary inclination for investors to “buy the dip” was all but absent. What now for the major market indices?

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What’s On Sale?

The U.S. stock market has been flying higher like a bottle rocket since late last year. After such a good run for the broader market, it can seem like absolutely nothing is left out there to buy. But no matter what the environment may be at any given point in time, the market of U.S. stocks always has something on sale for those interested in perusing the clearance aisle.

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10 Years After

The U.S. stock market has been roaring for the past eight years and counting. Since bottoming in March 2009, the total returns for investors have been consistent and robust. But it has come in an environment where the underlying economy and corporate earnings have been lackluster at best. Thus, with stock prices growing much faster than underlying earnings for so many years, the market has become expensive not only on a short-term basis but also from a long-term perspective. And, this has important implications for the expected returns from stocks over the next decade as this valuation premium is worked off.

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A Correction Is Already Under Way

Many investors have been contemplating the potential for a U.S. stock market correction starting some time over the next couple of months after what has been a remarkable year to date. Whether such a pullback on the headline benchmarks actually comes to pass remains to be seen. But in many respects, a correction in U.S. stocks has already been underway for nearly a month now.

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