What a REAL Stock Market Correction Could Look Like

Stocks had one of their worst days in weeks on Thursday, thanks to worries about tensions between Russia and Ukraine and the size of an economic slowdown in China. Not only did stocks tumble, with stocks in Russia among the hardest hit, but U.S. bond yields fell as investors sought safety from the volatility of stocks.

The slump was nasty enough that lots of pundits began to talk about whether the long-awaited market correction is at hand. The Dow Jones Industrial Average fell some 231 points, or 1.4%, to 16,109. The Standard & Poor’s 500 Index slid 22 points, or 1.2%, to 1846, and the Nasdaq Composite Index tumbled 62 points, or 1.5%, to 4,260.

Which leads us to the question: What could a correction look like?

Let’s look at what might happen using the recent closing highs of the Dow, S&P 500 and Nasdaq. The Dow’s closing peak came on December 31 at 16,576.66. The S&P 500 topped out 1,878.04 on March 7, and the Nasdaq’s high since the 2009 market bottom was 4,357.97 on March 5.

So, here is what a pullback might look like, and what it might mean.

The market falls 10% from its peaks, the minimum conventional definition of a correction. That would put the Dow at 14,919. The S&P 500 would be at 1,878, and the Nasdaq’s level would be 4,358.

The market suffers a 20% pullback. The Dow ends at 13,261, with the S&P 500 at 1,502. The Nasdaq drops to 3,486.

The market sags some 30%. The Dow falls to 11,604. The S&P 500 hits 1,315, and the Nasdaq is at 3,051.

Under all three scenarios, then, the indexes would still be way above their 2009 bottoms. Even with a 30% pullback, the Dow would still be up 77%, for example, with the S&P 500 up 94% and the Nasdaq up 140%.

That is the good news. A 20% pullback, however, would push the Dow and S&P 500 below their October 2007 peaks: 6.4% for the Dow and 4% for the S&P 500. The Nasdaq would be ahead about 22%.

A 30% decline would push the Dow 18% below its 2007 high and the S&P 500 at 16% under its 2007 peak. The Nasdaq would still be 6.7% above its 2007 peak. That scenario means real pain on paper. If you had, say, a $500,000 retirement fund invested all in stocks, a 30% pullback would drop the value of the fund to $350,000. That alone should make investors nearing retirement start looking to add ballast to their holdings with fixed-income investments. A market plunge would see interest rates fall, too, and bond prices probably would move higher.

It is true that the market is looking peaky. The S&P 500 has been unable to crack 1,900 even as many analysts believe fervently it will end the year above 2,000.

Yet, a crash on the order of 2007 to 2009 requires a major destabilization of key elements of the economy, especially banks and real estate. The knowledge of what to look for is much greater now.

So, there may be a correction. It could even be deep, but it may not last long.