While October used to be the scariest month for stocks, August has picked up the mantle over the past quarter century. And so far, this month is living up to its frightening reputation.
The Dow Jones industrial average is already down more than 1,000 points in August, with a week still left to go. On Friday, Wall Street—thrown into a tizzy by crashing Chinese equities and yet another global slowdown—pushed the Dow into an official correction, which refers to a short-term drop of 10% or more.
The only thing worse would be a bear market, which represents a 20% decline or more.
Several blue chip stocks are already in the grizzly’s maw, including venerable names such as Apple APPLE INC.
, Chevron CHEVRON CORP.
, Intel INTEL CORPORATION
, Walmart WALMART INC.
, Exxon Mobil EXXON MOBIL CORPORATION
, and Procter & Gamble PROCTER & GAMBLE COMPANY
The Dow wasn’t the first guest to join this loser’s party.
The Russell 2000 index of small-company stocks entered a correction on Friday several hours before the Dow. And as MONEY noted, biotechnology stocks, media-company shares, real estate investment trusts, commodities, and commodity-related stocks are all in the same boat.
The one last benchmark that Wall Street is looking at will be the Standard & Poor’s 500.
Why is the S&P so important?
For starters, the index represents the country’s 500 biggest and most influential companies, giant businesses with global reach that dominate every major industry in the economy. It is the benchmark followed by many professional money managers and replicated by many individual investors holding index funds.
And the S&P 500 has not found itself in a correction in four years.
Sam Stovall, U.S. equity strategist for S&P Capital IQ, points out that “the S&P has gone 47 months without a decline of 10% or more, versus an average of 18 months” going back since World War II. Actually, the median time in between corrections is only one year.
It’s important to remember that not all corrections morph into bear markets.
* In the summer of 2011: The S&P 500 sank nearly 19%. Yet stocks regrouped and wound up doubling in value ever since—and that’s after counting the recent market losses.
* At the start of 2003: The stock market sank 14%. But then it rallied for another four and a half years, during which investors doubled their money.
* In the summer of 1998: The S&P 500 got a huge scare and sank 19% amid falling oil prices, currency troubles in Asia, and a global slowdown in emerging economies such as Russia. Sound familiar? Well, the market recovered in the fall and rebounded for another year and a half, boosting stock values by 60%.
Sometimes, corrections can relieve pressure building in the market, much like a tremor might delay a really big earthquake from striking.
Stovall notes that already, the market’s decline has lowered the S&P 500’s price/earnings ratio to 17.1 (based on trailing 12 months of operating profits). That means the market is trading at a slight discount to its historic valuation since 1988. Prior to the selloff, the market was trading at a premium.
Is that enough to relieve pressure in the market so we can avoid The Big One? We’ll see.