March 12, 2020 / 11:00 AM / a month ago

RPT-As S&P 500 selloff approaches 20%, what next?

 (Repeats with no changes)
    By Noel Randewich
    SAN FRANCISCO, March 11 (Reuters) - Fear about the
coronavirus has pulled the S&P 500 down nearly 20% from its
record high. So what? 
    For many investors, Wall Street's recent deep losses are
marking the end of the longest S&P 500 bull market on record,
and their question now is, how deeply will a new bear market
fall before recovering? 
    Following three weeks of volatility on Wall Street, the S&P
500        will be confirmed to be in a bear market - by a
traditional definition - if the benchmark extends its decline to
    The Dow Jones Industrial Average        on Wednesday tumbled
5.86%, bringing its loss from its Feb 12 high to 20.30%,
confirming it has entered a bear market. The S&P 500 fell 4.89%,
extending the loss from its Feb 19 record high to 19.04% for the
first time.             
    The Nasdaq dropped 4.70% and is now down 19.0% from its
high, also on Feb 19. 
    The latest investor pessimism came after the World Health
Organization classified the coronavirus outbreak as a pandemic,
and after Reuters reported that the White House had ordered
top-level coronavirus meetings to be classified.             
    Further deep declines on Wall Street may depend on whether
the health crisis pushes the U.S. economy into its first
recession in over a decade.
    Many investors generally consider a bear market to be marked
by a 20% drop in a security or benchmark from a major high, a
development often accompanied by long-term pessimism and more
declines. By that measure, the S&P 500 has experienced eight
bear markets since the 1960s, according to Yardeni Research. 
    However, strategists warn the arbitrary 20% definition of a
bear market is more useful for examining history than for making
predictions in the midst of a dramatic selloff. A 20% decline in
and of itself does not necessarily mean things are about to get
even worse.
    "A 20% drop is somewhat arbitrary. It's useful for bucketing
things so that historians can go back and label environments.
But it's not really useful in the here and now," said Willie
Delwiche, an investment strategist at Robert W. Baird. Delwiche
is counseling his clients not to panic about the recent
    Factors like the speed of the market's decline, how much
average stocks have suffered, and the reasons behind the selloff
also contribute to whether investors view a deep downturn as a
turning point in sentiment or a short-term interruption in a
long-term bull market. Historically, more intense bear markets
have been accompanied by recessions.
    For example, the S&P 500's 15-day selloff from its record
highs to its current level has been the fastest since 2009,
according to Refinitiv data. 
    Less than three months into 2020, the S&P 500 has already
seen 11 days of declines of greater than 1%, compared to 15 such
days in all of 2019. (For a graphic showing recent market
volatility, click here)
     Delwiche said he views market slumps in 2011 and 2018 as
bear markets, based on the intensity of those declines, even
though the S&P 500 fell less than 20%.
    Since the S&P 500 hit a record high on Feb 19, the median
change of its components has been a drop of almost 21%. Stocks
down that amount include Alphabet           and Universal Health
Services Inc        . 
    Bear markets that coincided with U.S. recessions saw 37%
declines in the S&P 500 on average, before bottoming out, while
bear markets unrelated to recessions on average brought falls of
24%, according to LPL Financial. 
    In an analysis of bear markets, LPL included selloffs that
fell just short of 20%. Overall, seven out of 15 selloffs on its
list, going back to 1946, were accompanied by recessions.
    Strong U.S. February employment data and other recent
economic indicators likely do not capture the impact of the
coronavirus, leaving financial markets and economists to
anticipate severe economic disruptions in the months ahead. Many
economists believe the virus, which causes a flu-like illness,
may be the catalyst that interrupts the longest economic
expansion on record, now in its 11th year. In that case, the
stock market could continue to decline.
    "If China truly has seen its coronavirus cases stabilize, if
we see something similar, this could be a fairly short-lived
bear market," said Peter Tuz, president of Chase Investment
Counsel in Charlottesville, Virginia. "If we do not see that,
this could last for many months."
    Goldman Sachs said on Wednesday the S&P 500 bull market is
likely to end soon, forecasting a 28% slump from its February
peak as the coronavirus takes a toll on corporate profits.
    "We're aware that the forward data is going to fall off a
cliff, with the coronavirus taking hold," said LPL Financial
senior market strategist Ryan Detrick. "But we don't think the
end of the world is coming and that the coronavirus will have a
lasting effect on the economy."  

 (Reporting by Noel Randewich, additional reporting by Stephen
Culp in New York, editing by Alden Bentley and Cynthia Osterman)
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