Pullbacks of 5% or more are considered normal. But with stocks in an early summer swoon and angst over the Federal Reserve’s plan to pull back on stimulus, investors wonder when the selling will end.
NEW YORK — Spooked by worries of a less-friendly Federal Reserve, rising interest rates and renewed China fears, the stock slide intensified Monday, pushing the broad market down more than 5% from its peak and into “pullback” territory for the first time since November.
Wall Street’s continued slump raises the question of whether the early-summer swoon is nearing an end or if bigger losses lay ahead.
Investors continue to fret over the coming transition to less market support from the Fed, which has hinted recently that it plans to slow its $85 billion in monthly purchases of bonds later this year if the economy keeps improving. That unconventional policy, in place since 2008, has kept borrowing rates low and goosed asset prices. Investors fear the economy will suffer a relapse without the Fed’s steroid-like stimulus and the recent surge in the 10-year U.S. Treasury bond to its highest level in nearly two years.
Adding to investor angst: A credit crunch in China has raised fears that its once-booming growth will continue to slow.
Those worries are to blame for a 1.2% drop to 1573 for the Standard & Poor’s 500-stock index Monday, which pushed the index down 5.8% from its May 21 high of 1669.
The 5%-plus drop, the common definition of a pullback, is the 18th in the current bull market that began in March 2009 but the first since late last year, says Bespoke Investment Group. The average pullback: 8.3%.
So how far will stocks fall? Here are some possible scenarios:
• Just a “pullback.” The current skid will likely end with a high-single-digit percentage loss, exactly where pullbacks in bull markets normally stop, predicts Paul Schatz, president of Heritage Capital. He also expects money managers who have been looking for a sizable price drop before getting back in the market to use this dip as a buying opportunity.
“A lot of the sidelined money,” he says, “still thinks the economic fundamentals are good and getting better and that this drop has been an overdone reaction to the Fed and China.”
• A coming “correction.” The recent turbulence is “merely the beginning” of a turn that “will put stocks back on the road south” and pretty much wipe out most of its 2013 gains, says Gina Martin Adams, senior analyst at Wells Fargo Securities.
She now expects the S&P 500 to end the year around 1440, which would equate to a nearly 14% drop from its May 21 record high. That decline would fall into the category of a correction, or a 10%-plus drop. She fears rising interest rates will result in investors paying less for a company’s earnings stream than they are now.
• Bad “bear” market. The market has topped and the low is far away, warns Woody Dorsey, president of Market Semiotics. He says the market is in a “unique” historical situation, due in large part to the experimental policies of the Fed.
“Expect unexpected market behavior,” he says. “The market decline could be on the order of a 100-year flood.” In other words, a drop of more than 20%, the common threshold for a bear market, is more than possible.
