Stock Markets Enter Correction Territory

Market Blog

Amid increasing concerns about the spread of the coronavirus (COVID-19) and its potential impacts on global economic growth, many major global stock markets entered correction territory on Thursday; a correction is generally defined as a 10% or more peak-to-trough decline based on closing prices.

Around the world numerous large cap equity indexes, including the NASDAQ Composite, Dow Jones Industrial Average (Dow), Stoxx Europe 600, and FTSE 100, closed with corrections from recent highs. The Dow’s largest ever daily point drop made headlines, but in percentage terms, the decline actually ranked only 125th of all time. The S&P 500 Index closed down more than 4% on the day, the latest of six consecutive down days, which cumulatively wiped off more than 12%  from last week’s record closing high on February 19, the fastest ever such correction from a record high.

As shown in the LPL Chart of the day, the S&P 500 broke lower through both the 50- and 200-day moving averages, entering correction territory around the 3,050 level before ending the session at 2,978. After Friday’s open lower at 2,916, based on our technical analysis, the next level of support is the August 2019 low of 2,822.

Next-S&P-500-Support-at-August-2019-Lows

“While corrections can be unsettling, especially the stomach-churning volatility we’ve experienced this week, it’s important to remember that they are a normal part of the markets,” said LPL Financial Senior Market Strategist Ryan Detrick. “We continue to expect a return to pre-outbreak levels of global economic growth and corporate profits within the next several months, which we expect may help lift stock prices back to previous highs later this year.”

We acknowledge that the swiftness and severity of the sell-off has been unnerving. To put the recent weakness in perspective, the average year since 1980 has witnessed the S&P 500 pull back from peak to trough 14% on average. Even the years that finished higher experienced a pullback of 11% on average. We didn’t expect stocks to pull back this quickly, but after a historically calm stretch to end last year and start this year, a pickup in volatility didn’t come as a surprise, and it is still within normal ranges. Despite the increase in volatility, the fundamentals suggest the possibility of a second-half economic rebound, potentially aided by government stimulus, which could help this record-long economic cycle continue into 2021.

For more of our investment insights and thoughts on the coronavirus, check out our latest LPL Market Signals podcast Coronavirus Risk and Global Growth.

 

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