August 5, 2011
It’s official: The stock market is in a “correction,” a benign euphemism that really means that lots of people have been losing their shirts. Thursday’s market meltdown, in which the Standard & Poor’s 500-stock index plunged 4.8 percent—its worst one-day drop since Jan. 20, 2009—left the index 12 percent lower from its April 29 close of 1363.61. The Dow Jones Industrial Average tumbled 4.3 percent Thursday and the Nasdaq dropped 5.1 percent, meaning that those averages have also retreated more than 10 percent from their recent highs—the demarcating line Wall Street uses to distinguish between a mere pullback and a full-fledged correction.
The major indexes have now given back all their gains for 2011, with the Dow now down 1.7 percent on the year, the S&P 500 off 4.6 percent, and the Nasdaq 3.6 percent in the red.
Investors, have plenty of terms they use to describe routs like Thursday’s, or the tanking of the last two weeks. Aside from “correction,” the more common ones that aren’t ‘X’ rated include “capitulation,” “bear market,” and, of course “crash” (reserved for when things turn really ugly really quickly). Some investors called Thursday’s broad-based selloff a capitulation but whether they’ll still be using that term—and not the scarier ones—next week, next month, or next year is yet to be determined. As John Prestbo, executive director of Dow Jones Indexes, notes in an emailed statement, “The question now is, have investors finished lowering their expectations or is there still some way to go?”
Thursday’s market dynamics didn’t offer much hope for a quick rebound. The selloff accelerated into the close, with the Dow nose-diving 154.96 points, or 1.34 percent, in the final hour of trading. And though we’re in the dog days of August, this was no light summer session; trading volume reached its highest level this year. A key gauge of investor fear, the Chicago Board Options Exchange Volatility Index (or VIX), shot up 35 percent. And some investors even tossed around the “P” word: panic.
The market has been here before, though—and not all that long ago. The last stock market correction came in the summer of 2010, when the S&P 500 fell nearly 14 percent from mid-April to late August. Not coincidentally, the last time the VIX closed as high as it did Thursday was July 1, 2010. And since 1962, there have been 25 corrections of more than 10 percent in the midst of bull markets, according to data from Birinyi Associates cited by The Wall Street Journal. Just nine of those slides developed into declines of 20 percent or more from the market peak, or as it’s more commonly called, a bear market.