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Phew, the S&P 500 Correction Is Over—for Now

Brown Bear, Ursus arctos horribilis, Cub Playing on a carBrown Bear, Ursus arctos horribilis, Cub Playing on a car

The S&P 500 rose more than 2% Friday, lifting the stock market index out of the correction in which it had been stuck the past two weeks.

Since peaking last May, the S&P 500 is down less than 9%—just shy of a correction, which occurs when stocks decline at least 10% from their prior high. (If they fall 20% or more, it’s considered a bear market.) The stock index had hovered below the 10% threshold since falling beneath it on Jan. 14, and last week reached its lowest point since the peak. It was the S&P 500’s first correction since last August.

The Dow Jones Industrial Average and Nasdaq each gained about 2% as well on Friday, though both are still off more than 10% from their respective highs last year. After shares of Warren Buffett’s company Berkshire Hathaway (BRK-A) approached bear market territory earlier this week, they have bounced back somewhat, but are trading 14% below their peak a year ago.

The S&P 500 broke out of correction territory for the first time since mid-January on Friday. It had sunk into a correction two weeks earlier, falling 10% below its previous high last May. Bloomberg
Bloomberg

Though the S&P 500 appears to be on the upswing lately (see above chart), it’s not out of the woods yet. On average, it takes the S&P 500 four months to fully recover from a correction, S&P Capital IQ equity strategist Sam Stovall wrote in a research note this week. In fact, stocks don’t truly escape a correction until they return to their previous peak, according to Stovall. He doesn’t even count the S&P 500’s drop this month as a correction: To him, the index has been experiencing the same thing since last summer, “because the 500 never got back to breakeven in which to ‘reset the counter.'”

 

Until the S&P 500 sets a new record high, Stovall isn’t even tallying stocks’ recent volatility as a market event, because it’s too early to classify what’s actually happening, he says. “We don’t know if this decline will end up as a deeper correction or even a bear market.”