U.S. stocks entered a market correction — defined as a 10% drop from a recent peak — on Thursday this week as fears around the global spread of Corona virus 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. 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.The S&P 500 would need to close at or below 2,709 to enter a bear market, while the Dow would need to end at or below 23,641. The bear-market threshold for the Nasdaq rests at 7,854. As of Friday, these three indicators stood at 2,954 (S&P 500), 8,567 (Nasdaq) and 25,409 (Dow Jones).

With no vaccine in sight to stem the proliferation of the virus and a stream of negative earnings reports coming from US companies, markets have to rely on Fed cutting interest rates, providing financial support and possibly, a fiscal stimulus policy to reassure the markets. Of course, none of these measures are going to happen in the next week and so, there could be further bloodshed in the coming days.

Future Wealth’s View

In our article just last week, we had cautioned investors with the comment that “we find ourselves in the same situation as 1997 –  equities are in a position similar to where they were – expensive and headed towards bubble territory” and that “it is time to take a deep breath and take a look at the fundamentals of the market, their own risk profile and timeframe”. Link to the full article is here – https://futurewealthllc.com/looking-for-correlation-between-gdp-growth-and-sp-500-returns-2/

As much as corona virus was the primary reason for the recent sell off, we also believe that markets were priced for perfection and at historically high valuations. As such, any news that could derail the market was naturally expected to be more severe than previously anticipated. However, it is important to look at the facts – in Dec 2018, S&P 500 fell 20.2% from its high in Sep 2018, only to recover and post a blockbuster 2019. And, there were other double digit declines in the past decade (see table below) that shook up markets but then recovered to continue its path upward.

As the saying goes “The sun will rise again. The only uncertainty is, whether or not, we will rise to greet it.”