Sharp declines in stocks brings the Standard & Poor's 500 index closer to a 'correction'

The downturn in the U.S. stock market has brought it closer to what professional investors refer to as a “correction.” That happens when a benchmark index like the Standard & Poor’s 500 closes 10 per cent or more below a recent peak.

The S&P 500 index is now 7.4 per cent below the peak of 2,011.36 it reached on Sept. 18. It would have to close at 1,810.22 or lower to mark a correction.

The last time that happened was three years ago, in October 2011, two months after the ratings agency Standard & Poor’s stripped the U.S. government of its AAA credit rating. The correction before that occurred in July 2010 as Europe’s debt crisis flared.

On Wednesday, the S&P 500 traded as low as 1,820, which would have put it 9.5 per cent below the recent peak. Market purists look mainly at closing figures, not intraday levels, to determine whether a correction has occurred. Many professional investors see corrections as healthy for the market in the long term and good opportunities to add to holdings.

Since the S&P 500 is the mostly widely used benchmark for U.S. stocks, investors watch it to judge whether the overall market has entered a correction.

In a worrisome sign, some parts of the U.S. market are already in correction, notably small-company stocks, and important indicator of investors’ willingness to take on risk.

Small-company stocks, as measured by the Russell 2000 index, have fallen 11.3 per cent since hitting a peak in July and are down 7.8 per cent for the year.

Sam Stovall, chief equity strategist for S&P Capital IQ, notes that since 1979 there have been 10 years in which small-company stocks fell. Of those 10, there were six in which the S&P 500, a gauge of large-company stocks, also fell.

Also, the Nasdaq composite, which is heavily weighted with technology stocks, came close to entering a correction Wednesday.

The Nasdaq dropped as low as 4,116.60 in early afternoon trading, or 10.5 per cent below its Sept. 2 peak of 4,598.19. However the index recovered nearly all the ground it lost by the end of the day and closed down just 11.85 points at 4,215.32, meaning it didn’t meet the widely used definition of a correction.