A stock market correction occurs when a market falls 10% or more in a short period of time. Across the pond, both the Nasdaq and S&P 500 indexes entered correction territory this week.
Could the same be on the way on this side of the Atlantic. If so, what might it mean for investors?
Different drivers
Trying to predict what happens next in the stock market is tough and is usually mere speculation.
I prefer to spend most of my investing efforts finding great shares to buy at attractive prices, regardless of what the wider market is doing.
Some of the reasons for the recent US stock market correction seem less relevant from a British perspective. The Nasdaq is stuffed with tech titans like Amazon and Alphabet. The broader tech sector has been hit by valuation concerns after a strong few years. By contrast, there is not a single pure tech company in the 20 biggest firms of the FTSE 100.
However, I think some other reasons for this week’s stock market correction Stateside could also be relevant here. The outlook for the global economy remains uncertain. Concerns about the prospect of higher oil prices are feeding into worries about the potential impact on company profits.
Don’t panic!
Some investors take fright when the stock market takes a sudden tumble.
Instead I look for inspiration to an improbable financial guru: Lance Corporal Jones of Dad’s Army. I draw inspiration from his words “don’t panic!”
That is because, as legendary investor Warren Buffett puts it, the stock market is like someone who offers to sell you shares or buy them from you at a certain price, on any given day. It is not necessarily an accurate guide to what the long-term underlying value of companies actually is.
Sometimes shares can surge in price. At other times, a stock market correction can bring them back to earth suddenly.
For me, what matters is whether, at any given moment, I can buy shares in companies I would like to own for substantially less than I think they are really worth from a long-term perspective.
Building a list of UK shares to buy
What is certain is that, sooner or later, there will be another stock market correction in the UK.
What we do not know is when. It could be today, next month, next year or decades from now (although personally I would be surprised if it turns out to be as far off as that).
My focus is on building a shopping list now of shares I think could be great for me own for the long term, if only I could buy them at what I see as an attractive price.
That way, whenever the next correction does come, I will be ready to use it to my advantage by scooping up what I see as bargain shares.
