S&P 500 now in a correction
The benchmark Standard & Poor's 500 index is officially in a "correction," defined as a loss of 10 percent or more from a recent peak. It plunged 2.3 percent Monday to 1,407.22, erasing its 2007 gains and leaving it 10.1 percent below its Oct. 9 all-time high of 1,565.17.
A correction is significant because it means the weakness in the stock market is broad-based. The Dow Jones industrial average and Nasdaq composite are also sporting declines of 10 percent and 11.1 percent, respectively.
"What amazes me is how fast it happened," says Brian Gendreau, investment strategist at ING Investment Management.
The swift reversal, Gendreau says, can be attributed to continued turbulence in the credit markets and big losses at many of the world's banks caused by a wave of mortgage defaults. Wall Street is worried that the housing meltdown will cause an economic recession.
Credit jitters surfaced again Monday. HSBC, Europe's biggest bank, said it was injecting $35 billion to support two of its structured investment vehicles, or SIVs, which have been hurt by the seizing up of credit markets. HSBC, according to an analyst at Goldman Sachs, might also have to write down $12 billion to cover losses in subprime mortgages and home equity loans issued in the United States.
"There's still a lot of concern with future write offs," Gendreau says. "Until we get a better read on how much damage the credit crisis has done to the economy, stocks will go sideways at best."
Corrections, which on average occur once a year, have been scarce since the current bull market began in October 2002. But investor reaction to the current double-digit slide is similar to past corrections. Investors have become more defensive and more risk averse. "People are a little afraid," says Chris Johnson, chief investment strategist at Johnson Research Group.
Indeed, money is flowing out of stocks and into U.S. Treasury bonds, considered among the world's safest investments, says Mario DeRose, fixed income strategist at Edward Jones. The benchmark 10-year Treasury note has been rallying. Monday, its yield, which moves in the opposite direction of price, plunged to 3.85 percent, from 4.01 percent Friday - it's lowest yield since March 2004.
"It's a flight to quality," says DeRose. "People are getting more risk averse."
A correction means stocks are half-way to a bear market, or a decline of 20 percent. The 2000-2002 bear wiped out half of the S&P 500's value.
"The market is at a crossroads," says Johnson. "Right now we are teetering between a bull and bear market."
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