How far will stocks fall in the market's latest bout with fear and loathing? A look back at prior Wall Street downdrafts since the bull market began in March 2009 offers clues - and some comfort to worried investors if history serves as an accurate guide.
The Standard & Poor's 500 stock index's current 5.8% drop from its Jan. 15 record high of 1848.38 marks its 19th pullback of 5% or more in the current bull, according to Bespoke Investment Group. Monday's 2.3% drop was the index's worst start to February since 1933.
While the plunge has been quick and violent, the decline is still below the average 8.2% pullback the S&P has suffered in its five-year uptrend. So there's a good chance the pain meter will ramp up some more. But the bulk of the market rout could also be behind us, as well.
The pullback could last longer, recent history says. Heading into today's trading session, the downturn has lasted 19 days, less than the 25-day average for 5%-plus pullbacks since March 2009, Bespoke says.
Jeff Kleintop, chief market strategist at LPL Financial, thinks the current pullback will end before the market suffers a double-digit percentage decline. The S&P 500's last official 10% correction was a 19.4% drop that ended on Oct. 3, 2011, Bespoke says.
Kleintop doesn't believe the turmoil and weakness in emerging markets will cause a sharp deterioration in global economic growth. Nor will it "spread and tip the world back into a global recession," he says.
Kleintop also downplays the ISM's weak reading on U.S. manufacturing in January, citing nasty weather as a main reason for the biggest drop in eight months. He notes that four of the five other January manufacturing surveys (from regions including Philadelphia, New York, Kansas City and Dallas) all rose.
"We think the underlying trend is still a stronger economy in 2014 and think the data will soon begin to bear this out as the weather distortions fade," Kleintop says.
So what do investors do? Kleintop says, "buy the dip."
"We are buyers on this 5% dip," he says. "With all areas of the stock market down in our portfolios we are adding small caps and broad stock market exposure."
But patience might be a better strategy, especially if you believe a full-fledged correction of 10% is in the cards.
That can't be ruled out, says Sung Won Sohn, professor of economics at California State University Channel Islands.
"A 10 percent correction is likely as the emerging markets rattle (investors)," says Sohn.
He believes the U.S. market is being weighed down by a variety of factors, including emerging market troubles, a nearly 15% drop in Japanese stocks sparked by a rising yen, and the Federal Reserve's shift to a less accomodative monetary policy.
"In Japan, the yen has appreciated in the new year causing the Nikkei 225 to fall significantly," says Sohn. "This has a negative effect on the U.S. market where the sentiment is already fragile. In the U.S., earnings are better than expected, but the 'tapering' by the Fed is weighing on the market. There is (also) a sentiment that U.S. stocks have outpaced the fundamentals and are due for a modest correction, which would be good for the market in the long run."
There have been just two corrections of 10% or more since the bull market began.