With the stock market sliding lower as coronavirus fears rise, all the talk about a so-called “correction” can cause nervousness and confusion.
A correction is a mechanical-sounding term to describe when a major stock market index like the Standard & Poor’s 500 falls 10% or more from a recent closing high. The recent losses on Wall Street pushed all three benchmarks into correction territory during trading on Thursday, although the market has not yet closed, and so there’s no offical correction yet.
The Dow Jones industrial average tumbled as much as 960 points, while the S&P 500 and the Nasdaq Composite both dropped more than 2%.
If the S&P 500’s closes in a correction on Thursday, it would mean it took just eight calendar days for the broad index to meet the 10% threshold — its fastest such drop since World War II, according to Sam Stovall, chief investment strategist at financial-research company CFRA.
The takeaway: The recent slide could cause more pain.
“The swiftness of this decline signals the magnitude of uncertainty being expressed by investors,” Stovall said. “Even though history says that other viruses haven’t been a major event to corporate bottom lines, investors are thinking this time might be different.”
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How bad were the biggest corrections?
Since a correction is a drop between 10 and 19.99%, there’s always a chance we’re only about halfway through this recent scare. The market fell more than 19 percent in corrections in 2018, 2011, 1998 and the 1976-78 period, CFRA data shows.
But even so-called “garden variety” corrections can cause fear levels to spike.
The good news? Not every correction morphs into a more feared bear market, a 20% or higher drop. The average bear since 1929 has sliced nearly 40% off the S&P 500.
Most bear markets coincide with a recession.
In the 23 corrections since World War II the average price drop for the S&P 500 has been 14 percent, according to data from CFRA. They normally last around 4.4 months.
Greg McBride, a chief financial analyst for Bankrate.com, thinks a recession is an unlikely, but “ever-present threat.”
“We’re not immune from the economic cycle. Disruptions to economic expansion can certainly be the catalyst for a recession,” McBride said. He added that the jumpy stock market is a reflection of uncertainty surrounding the spread of coronavirus.
“In the face of uncertainly, markets and valuations are being subjected to a rapid reevaluation. That’s what’s underpinning the selling action that’s been prevalent this week,” McBride said.
Jessica Menton of USA Today contributed to this article.