Adding Perspective On The Stock Market Sell-Off

Includes: DIA, EEM, IWM, SPY, VWO
by: The Financial Lexicon

Given the recent pullback in broader-market indices, it seems like an appropriate time to add a bit of perspective with the following four nuggets:

1. Even after this week's pullback, the S&P 500 (NYSEARCA:SPY) is just 3.27% off its all-time high. Similarly the Dow Jones Industrial Average (NYSEARCA:DIA) and Russell 2000 (NYSEARCA:IWM) are just 4.27% and 3.21% off their all-time highs. If these small pullbacks from all-time highs are causing you any type of serious anxiety or stress, it may be a sign that you are too heavily allocated to stocks. Thus far, the magnitude of the selloff is not a big deal. It certainly could turn into a big deal. But it's not yet even close to that point. Whenever the next bear market arrives (whether that time is now or in the future), stocks are likely to sell off by 20% to 60%, depending on the reasons for the bear market. That would be a time for anxiety and stress. Today, however, is not.

2. Last year, money managers seemed quite excited to buy every single minor selloff in the broader indices. I think a major reason for this was that the speed with which the market went up toward the beginning of 2013 caught many money managers by surprise. They were therefore playing catch-up all year and likely felt forced to buy any dip. Now that the calendar has reset and the major-market indices have started 2014 with declines, there is unlikely to be the same type of urgency that existed last year to get long the market. Instead, money managers can sit back and quietly observe the situation, buying them time when deciding whether current valuations really make sense given earnings growth rates and macro-economic risks.

3. We are quickly approaching three years since the popular emerging markets ETFs from iShares (NYSEARCA:EEM) and Vanguard (NYSEARCA:VWO) topped out. Moreover, since the fall of 2011, price action has largely been one of consolidation, albeit within a wide range. It is well known that the emerging markets are going through a difficult period. When selloffs or consolidations last for many months or sometimes several years, it can be a frustrating experience for investors with short-to-intermediate time frames. But long-term investors should rejoice. Long-term investors have been given and are continuing to be given a wonderful opportunity to slowly build positions in the part of the world that will be the engine of growth for decades to come. At this time, things don't look great. If, however, you are someone who has a time frame of 20 years of more, it is during these difficult times that taking advantage of the higher dividends, lower valuations, and stronger growth rates of the emerging markets makes sense.

4. If you want to buy stocks on this or any future selloff but aren't sure where to look for compelling ideas, here's one thought on how to get started: Spend some time scouring the sectors of the market that are not consumer staples or utilities, looking for companies that are outperforming in the down market. Often times, companies not in the consumer staples and utilities sectors that are outperforming the broader indices during stock-market selloffs also end up outperforming when the broader market turns to the upside. That's not always true with consumer staples and utilities.

Disclosure: I am long VWO, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.