What exactly is a market correction?
All told, 2014 hasn’t been the rosiest year on Wall Street so far. The markets are up a bit today after a dismal yesterday, but the Dow Jones Industrial Average is about 1,000 points lower than it was at the beginning of the year, and the S&P 500 is off about 75 points.
So: We’ve been hearing a lot lately about how a market correction is coming. Should we be bracing for the fall?
Historically speaking, yes.
Technically, a correction is a change of 10 percent or more, so the Dow would need to lose around 650 more points and the S&P 500 would need to drop by another 100.
“The S&p 500 has averaged a correction, that is a drop of 10 percent of more, every 18 months and currently we haven’t had one since 2011, so we’re about 28 months overdue,” says Alec Young, Global Equity Strategist at S&P Capital IQ.
Plus, many key economic indicators like manufacturing and unemployment indicate stocks should be a little lower says Bill Stone, Chief Investment Strategist at PNC Wealth Management. “We will get a 10 percent pullback sometime. Whether this is it or not is hard to say, but you ought to a be ready for it.”
Still, we’re probably not talking about a crash, because companies’ profits are pretty much in line with current stock values.
“The best measures of long run stock market fundamentals, the price to earnings ratio, is not in bubble territory,” says economist Heidi Shierholz, with the Economic Policy Institute in Washington DC.
But those profits don’t necessarily mean a strong economy. In fact, says Shierholz, a lot of Wall Street’s success has come at the expense of main street’s economy.
“The very weak labor market actually strongly reduces wage growth, and is one of the reasons corporate profits are doing so well right now.”
As for investors, PNC’s Stone says they should try to sit tight.
“That is, unfortunately, I guess the price of owning what has long term been the best performing asset class… you probably need Maalox along the way.”
Not the extra-strength Maalox we needed in 2008, though. Most economists expect the market will end 2014 a little higher than where it started.
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