Should you be worried now?
Probably not, at least not yet. Chances are remote that a repeat of the 2008 market disaster is upon us.
That’s not to deny that stocks set a new standard for gut-wrenching plunges right out of the gate Monday morning, with the Dow Jones industrial average falling more than 1,000 points in a matter of minutes, an intraday record. While the benchmark pared the loss to just 108 points by late morning, the slide resumed and the damage by the end of the day was bad: down 588.40 to 15,871.35.
Measured in points, the drop was the eighth-largest ever, according to S&P Dow Jones Indices.
The 3.6 percent decline didn’t crack the top worst days on that basis.
But it still hurt and, combined with steep declines Friday, the benchmark index lost 6.6 percent over two trading days.
Stocks all around the world got clobbered Monday, and traders said some panic was seen in the selling. Most European stock indexes fell about 5 percent, and the price of commodities continued to slide. Oil, already trading at six-year lows, fell further to $38.24 per barrel.
The culprit? Fears that China’s economy is downshifting significantly, coupled with worries that US growth could sputter.
The Shanghai Composite Index continued its nosedive Tuesday, tumbling 5.4 percent to 3,037.13 shortly after opening. The gauge plunged 8.5 percent on Monday.
“There’s real concern about the sustainability of China’s growth, which has been such a driver of the global economy,” said Shep Perkins, co-head of international equities at Putnam Investments in Boston.
Dramatic movements like the stock market’s plunge of recent days remind many individual investors of real calamities of the not-very-distant past — particularly the market collapse of 2008.
But there are good reasons why the current turbulent stock market is unlikely to become so devastating.
Though stocks had become expensive, they were not wildly inflated, as they had been in other market collapses.
And the most dangerous element to most bull markets — borrowed money, which can amplify gains but also deepen losses — does not play an especially big role in current events. Unlike in 2008, no big banks are in danger of failing. There is no tidal wave of bad mortgages about to crash over Wall Street.
So much for the good news. Investors also need to face the fact that stock prices have been going up nearly nonstop for six years. A real setback wasn’t just inevitable, it was overdue by historical standards.
In fact, the stock market has been headed generally lower for several months. The 30-stock Dow average has dropped 13.3 percent since its peak price, set on May 19, and the broader Standard & Poor’s 500 index has fallen 11.1 percent since its record level, reached on May 21. Both indexes are in “correction” territory — losing at least 10 percent from a peak. A loss of at least 20 percent from peak prices is considered a bear market. We might get there.
“This is a perfectly normal correction,” said Brad McMillan, chief investment officer of Commonwealth Financial Network in Waltham. “We haven’t seen one of them for years. This is scary, but normal.”
Though McMillan takes it in stride, he has one other thought about the slide.
“It may not be over,” he said.
Investors have enjoyed what is still considered a bull market since March 2009, the third-longest since 1932. It’s already run a year and a half longer than the average bull market. That should be considered a caution sign by itself.
Stock prices will probably remain under pressure because they depend most on the profits earned by companies. Tepid economic growth around the world makes it hard to boost earnings.
Consider this: The S&P 500 index has advanced 177 percent since bottoming out in March 2009 — even after its recent setbacks are taken into account. Those are big gains compared with the pace of economic recovery in six years.
A slowdown in China poses even more direct problems for companies that depend on business in that country for a large share of its revenues and profits. Apple Inc., the market’s most valuable company and the leading factor in stock indexes, now sells more iPhones in greater China than it does in the United States.
So what does this mean for individual investors?
The answer depends entirely on when they need their invested money. “If you need it anytime soon, you shouldn’t have a lot of money in stocks anyway,” said McMillan. “If you need it in 20 or 30 years, you should not worry about it. This is a chance to find out whether your ability to tolerate risk is as high as you thought.”
The stock market is going to struggle through the months ahead and surely could lose more ground. But Wall Street didn’t do anything stupid — borrowing money or inventing dangerous products — to make that problem this time. It’s just a setback that was a long time coming.