Today’s big slide in the S&P 500 brings it closer to the important 10% decline threshold that signals an official correction. At today’s closing level, the S&P 500 is off 7.8% from the high set in September.

Weakness in the market has been exacerbated by today’s weak U.S. retail sales data, which is feeding the narrative that economic problems in Europe, China, and Japan are spreading to the U.S. The news of another Ebola victim in the U.S. is not helping sentiment.

To put this in perspective:

  • This is the sixth correction of 5% or more since the 19% drop in the third quarter of 2011. The average decline of the previous five was 7.7%, so this is a bit worse.
  • We have gone 745 trading day without a 10% correction, the fifth longest on record. The average is 161 days, so it was probably overdue. But we went more than 3,000 days without a 10% correction during the nineties, so there is precedent for the streak to continue.
  • Although the S&P 500 is hovering around zero return for the year, it is still up almost 12% on a trailing 12-month basis.

We continue to believe that the sharp decline in oil prices and long-term interest rates will be a net positive for U.S. real GDP growth, and that a slowdown in Eurozone growth is likely to have only a modest impact on the U.S economy. Although the retail sales number was weak (-0.3% vs. consensus -0.1%), it comes after the August gain of 0.6%, the strongest in four months. Auto sales were particularly weak, but sales were at a 9-year high in August. In other words, a single month does not make a trend, but it does feed into the nervousness among investors. Recall that September’s job growth of 248,000 continues a strong trend in payroll gains, even after August’s number was weaker than expected.

Some encouraging signs of stabilization did appear at the end of the trading day today. The Dow Jones Industrial Average recovered almost 300 points from the lows it set earlier in the day, and stocks that have been leading the market lower in the last few weeks (small cap and energy companies) outperformed. It is difficult to forecast how long this weakness will continue, but lower valuations, seller exhaustion, oversold conditions, and decent corporate earnings should soon inject some needed optimism into investor sentiment.

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