Overdue correction
It took the Standard & Poor’s 500 index less than two months to drop 10.1 percent to 1,407.22 on Monday from an Oct. 9 high. Such a drop, widely defined as a correction, was the first for the broad market since 2003. About $1.4 trillion in stock-market value melted away in the period, says S&P senior index analyst Howard Silverblatt.
But based on history, the drop was overdue.
“That’s a longer period of placid market conditions than we usually have,” says Morningstar equities strategist Paul Larson. “It’s worth remembering that the stock market is a volatile place, and that’s something that was easy to forget in the past three or four years, when volatility was at a low point.”
The decline is halfway to a 20 percent fall, considered the threshold for a bear market. Of the 26 market corrections since 1946, 10 led to bear markets, says Sam Stovall, S&P’s chief investment strategist.
Though the financial sector, down more than 20 percent in the latest correction period, led the decline, consumer discretionary, telecommunications, industrial and material sectors also posted double-digit losses.
But the drop means some stocks now look cheap, as business fundamentals have not necessarily changed, Larson says.
“Investors are best served by buying individual stocks and not really trying to predict the overall market direction,” he adds.