Should investors beware of the bear?
U.S. stocks entered a market correction — defined as a 10% drop from a recent peak — on Thursday as fears around the global spread of COVID-19 rocked financial markets. For the S&P 500
the drop into a correction from an all-time high in just six trading days earlier was the fastest on record, according to Dow Jones Market Data. A 20% drop from the highs would meet the widely used definition of a bear market.
Equities opened sharply lower on Friday, with the Dow Jones Industrial Average
dropping more than 1,000 points at its session low. The Dow remained down 651 points, or, 2.5%, at 25,127, while the S&P 500 was off 1.9% at 2,922. The Nasdaq Composite
fell 1.2% to 8,465.
Stocks remained solidly lower after Federal Reserve Chairman Jerome Powell unexpectedly issued a brief statement Friday afternoon saying the central bank is “closely monitoring” the viral outbreak. Powell said U.S. economic fundamentals remain strong but that COVID-19 posed “evolving risks” and that the Fed would “act as appropriate” to support the economy.
Bear market thresholds
The speed of the current drop and uncertainty over the implications of the viral outbreak has left investors to wonder whether a bear market — defined as a 20% drop from a recent peak — could be in sight over coming weeks.
“We are now past a mere 10% technical correction and seem to be heading for a bear market, which is only logical when one considers the global backdrop,” said Michael Every, senior strategist, Asia-Pacific, for Rabobank, in a Friday note.
The S&P 500 would need to close at or below 2,708.92 to enter a bear market, according to Dow Jones Market Data, while the Dow would need to end at or below 23,641.14. The bear-market threshold for the Nasdaq rests at 7,853.74.
Selloffs always ‘feel like the end of the world’
At the same time, analysts reminded investors that stocks have seen plenty of corrections and smaller pullbacks, albeit not as rapid, over the course of a record bull market (by some measures) that got under way in March 2009. Those pullbacks offered welcome buying opportunities, with investors regularly rewarded for buying the dip.
Indeed, as Charlie Bilello, founder of Compound Capital Advisors, noted on Twitter: “They all seemed like the end of the world at the time.”
Some market watchers, while arguing against attempting to time the market, said relatively solid economic fundamentals mean that long-term investors should be prepared to use the downturn to look for buying opportunities.
“Looking at historical sharp market selloffs and spikes in market volatility during periods with generally healthy economic fundamentals suggest that the risk/reward for U.S. stocks is becoming more attractive,” said Mark Haefele, global chief investment officer for UBS Global Wealth Management, in a Thursday note.