Are markets shouting look out below?
The Dow Jones industrial average fell Monday into its first official "correction" since 2003, having dropped more than 10 percent from a mid-October peak. While shares have rebounded Tuesday and today, the correction was a wake-up call for investors worrying over lasting damage to their portfolios from still mounting housing and financial-sector woes, which began chipping away at the U.S. economy early this summer.
Here's a look at what past corrections tell us about the future of this one, courtesy of analysts at Ned Davis Research.
• Once the Dow corrects by at least 10 percent, the odds of a drop of at least 15 percent are about even.
• There have been 43 market corrections since the end of World War II, but they've become far less common in the past two decades.
• There's a bit more than a 1-in-4 chance of a correction ending in a decline of 20 percent or more—an official bear market—based on data looking back to 1946.
A bigger worry may be the fear a correction inspires in already jittery investors.
A Gallup Poll released Monday shows that 79 percent of investors say the U.S. economy is in a slowdown or a recession. That's the most pessimistic reading since November 2001. The latest consumer confidence survey for November from the Conference Board slumped 7.9 points to 87.3, a "pre-recession type plunge," according to Merrill Lynch's David Rosenberg, who notes drops of that size this time of year have happened only two other times—in 1991 and 2001.
Whether you trust polls or not—they're often a bit of a contrarian indicator—there's no arguing that the overarching fear plaguing markets is that a recession might be unavoidable. Goldman Sachs on Tuesday raised its forecast for the chance of recession from 40 percent to 45 percent on housing worries. Small-cap stocks are still teetering on the precipice of further selling, as investors shun more volatile U.S. asset classes. Safe havens like bonds are on the rise.
Amid all the uncertainty, it might be worth remembering that the latest bull market has been a brilliant one.
Ned Davis notes that between Monday and the last correction in 2003, the Dow went 1,154 trading days without a major pullback. That's the second-longest run in history, behind only a 1,724-day run between 1990 and 1997. Most post-World War II runs lasted less than a year.
Yet market watchers say worse could be on the way. Mike Tarsala, an analyst at Thomson Financial, says that while a year-end rally isn't out of the question, the S&P 500 has been flirting with technical levels that, if breached, could send markets down further.
"Where we close at the end of this month is going to be very, very important," he says. "This market could have further to fall."