Last week, it felt like the bottom dropped out of the stock market.
The blue-chip Dow Jones industrial average fell 4.5 percent for the week, ending with a 559-point rout Friday that left the index in negative territory for the year.
The benchmark Standard & Poor’s 500-stock index has fallen into a “correction,” meaning it’s off more than 10 percent from its peak reached Sept. 20.
And once-highflying tech stocks faltered with Apple, Facebook and Google parent Alphabet all ending last week showing stock-price losses for the year — driving the Nasdaq composite index into a correction too.
So is this it — the end of the decade-long bull market? Or is it the sort of normal, healthy pullback that often follows a strong showing?
“Everyone is trying to figure that out,” said Sam Stovall, chief investment strategist at CFRA Research, though he’s among those arguing that stocks are going through a typical retreat after lengthy gains, as they often have.
Obscuring any clarity for both professional money managers and millions of Americans with 401(k)s and other retirement accounts are conflicting trends that are keeping downward pressure on stock prices and sparking volatile trading.
They include the U.S.-China tariffs and trade battle, falling oil prices, the Federal Reserve raising interest rates, President Donald Trump’s mercurial bursts on Twitter, declining growth in corporate profits — and, ultimately, fears that the nine-year economic expansion is ready for a cyclical contraction.
This fall’s pullback is nowhere near as severe — at least not yet — as some of the major busts of the past two decades. The S&P 500 fell nearly 57 percent during the 2008-09 financial crisis and nearly 49 percent in the dot-com crash of 2000-02. Those were bear markets, or drops of 20 percent or more from their previous highs.
Second, the triple-digit swings in the Dow industrial average— while unnerving a decade ago — are now more common because the market has climbed so high since then, and the declines are less severe on a percentage basis. In contrast, when the Dow fell 508 points on Oct. 19, 1987, it was a 22.6 percent loss — the largest single-day percentage drop on record.
In addition, the stock market reached its highest levels in history only a few months ago, and that was after the market soared in 2017, when the S&P 500 gained nearly 20 percent and the Nasdaq composite rose 28 percent. As a result, it’s not surprising that investors would be willing to sell and capture those profits when signs of trouble surface.
Last year also was unusual for the dearth of volatility that is now again common.
“We had an incredible amount of investor optimism coming out of the election in 2016,” said Peter Heilbron, senior investment officer of Northern Trust Wealth Management. “Last year was the anomaly, not this year. A year like this is much more normal for the market than we had in 2017.”
That’s not to discount the pain investors have felt in recent months or how dangerous the trade and economic threats are to the market. The S&P 500 lost 6.9 percent in October, its biggest monthly decline in seven years.
And last week the yield on 5-year Treasury bonds fell below the yield for 2-year bonds for the first time since 2007 — a so-called inverted yield curve that is typically seen as a gauge of recession risk. (Investors typically are rewarded with higher yields for locking up their money longer, not the other way around.)
Yet stocks also are on pace to end the year with minor changes. Even after last week’s dreary showing, the Dow and S&P 500 were down only 1.3 percent and 1.5 percent for the year, respectively, and the Nasdaq was up 1 percent.
Investors also pay attention to how stock prices compare with the underlying corporate earnings for those stocks. If prices get too far ahead of the earnings growth, the stocks might be too “rich” or pricey and vulnerable to a sell-off. Conversely, if prices match or lag behind earnings growth, it might be a buy.
Early this year, the S&P 500 was trading at a price-to-earnings ratio of 18.7 times the expected average earnings of the S&P component companies for the next 12 months, according to FactSet.
Now, with the market having tumbled, that forward price-to-earnings multiple has fallen to 15.44, which is about average.
The consensus seems to be that corporate earnings are slowing — albeit from a blistering pace. Stovall said that at the start of this year Wall Street expected earnings growth of 11.5 percent for 2018.
“It looks like we’re going to see twice that amount, with average earnings (growth) for the S&P (companies) of 23 percent,” — profits, he said, that were partly fueled by the drop in federal corporate tax rates from the Republican tax cuts. But next year he projects that growth will slow to 7.5 percent.
“Investors are like hyperactive first-graders playing musical chairs and trying to anticipate when the music will stop,” Stovall said. “As a result, they’re thinking that earnings growth slowing is something we should worry about or extrapolate into a possible recession. We think it’s too early for that.”
Mark Esposito, founder of Esposito Securities in Dallas, thinks otherwise, partly because of the rise in interest rates.
Fed monetary policymakers have raised the central bank’s key short-term interest rate three times this year and are widely expected to raise it another 0.25 percentage points to a target range of 2.25 percent to 2.5 percent when they meet this month.
It would be the fourth increase this year, and in their last forecast, in September, Fed officials indicated there would be three more increases in 2019 — though they have recently given signs they could back off if economic data warrants.
The nation’s gross domestic produce rose at a 4.2 percent annual rate in the second quarter, the most since 2014. But the rate slowed to 3.5 percent in the third quarter as the initial stimulus from the tax cuts faded.
The UCLA Anderson School of Management last week predicted that the nation’s inflation-adjusted gross domestic product, or GDP, would slow from 3 percent this year to 2 percent in 2019 and 1 percent in 2020.
There’s also the fear that the Trump administration will follow through on raising tariffs further against imported Chinese goods if the White House and China can’t reach agreement in their trade talks.
The market’s pullback raises the question of whether stocks’ lower prices offer an entry point at which to buy stocks before of the next rebound. That’s what investors did last spring, after stock prices dropped back from a rally in January.
“We’re probably getting pretty close to that” point even if “there could be more weakness ahead,” Stovall said.
“I would say, yes, you could pick up some attractively valued, high-quality stocks now,” but given the swings like Wall Street saw last week, “I don’t think now is the time to be backing up the truck,” he said.