Dow, S&P 500 Enter Correction Territory As Coronavirus Fears Continue

A week after the S&P 500 and Dow Jones Industrial Average hit new all-time highs, the indexes plummeted another 4% and into correction territory after Goldman Sachs cut its 2020 S&P 500 earnings growth to 0%, well below consensus estimates of 7% growth. A market correction is defined as a decline of at least 10% from all-time highs.

Bullish sentiment among StockTwits messages mentioning the S&P 500 has dropped from 43.6% on Feb. 12 to as low as 31.6% on Thursday, its lowest level in a month.

History Of Corrections

The current market correction is due to concerns about the negative economic impact of the coronavirus outbreak. While there’s no way of knowing exactly when a correction will turn into a bear market, corrections have been extremely common throughout history. In fact, there have been 28 S&P 500 corrections of between 10% and 20% since the end of 1945, according to Guggenheim.

In other words, in the past 73 years, a correction similar to the one the market is currently undergoing has occurred roughly once every 2.6 years. These corrections have averaged four months in duration. The most recent market correction occurred in 2018.

In real time, it may seem as if the current correction has set the bull market back significantly, but Guggenheim found that the average time it has taken for the S&P 500 to recover to its previous highs for corrections of less than 20% is only about three months. If that pattern holds true in the current instance, the S&P 500 could be trading back at its February highs by mid-May.

COVID-19 Vs. SARS

In terms of the COVID-19 coronavirus itself, the closest comparison in recent history is the 2003 outbreak of the Severe Acute Respiratory Syndrome (SARS) virus. During the peak of the SARS scare from December 2002 to April 2003, the S&P 500 dropped 8.3% and stocks related to discretionary spending and emerging markets (particularly China) underperformed.

The good news is that over the next six months after the scare, the S&P 500 more than made up for its losses, gaining 18.6%.

The World Health Organization confirmed 8,098 cases and 774 deaths due to SARS during the 2003 outbreak, or a mortality rate of about 9.5%.

As of Thursday, there are 81,400 confirmed COVID-19 cases and at least 2,770 deaths, suggesting a mortality rate of 3.4%. At this point, at least, it appears the COVID-19 virus is much more contagious than SARS, but much less deadly.

How To Play It

Several experts have weighed in on what the current correction means for markets. TD Ameritrade's J.J. Kinahan said investors should expect the market volatility to continue for a while.

“When the markets get rattled the way they did Monday and Tuesday with 3% losses each day (something that hadn’t happened since the financial crisis of late 2008), it’s like a bell getting rung, and the vibrations can last long after the last chime,” Kinahan wrote.

Michael Batnick, Director of Research at Ritholtz Wealth Management, said investors should take the opportunity to reassess their risk management with the market just 10% off its all-time highs.

“A silver lining of market volatility is it reminds you what your actual tolerance for risk is. It might not be as high as you thought,” he wrote.

“ETF Professor” Todd Shriber recommended investors consider three ETFs as potential safe haven trades should the market enter correction territory.

Benzinga’s Take

Assuming the coronavirus doesn’t pose a catastrophic risk to the global financial system, any market correction or even bear market will only be temporary. Short-term traders must stay vigilant in monitoring all the latest headlines. However, long-term investors can simply look for opportunities to buy on the dip or simply hold steady in their current positions and ride out the volatility.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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