Well, that was quick. After stating in our Prudent Speculator commentary last week that even though the preceding week’s ugly selloff was brutal, the pullback had not reached the “correction” level of 10% on the S&P 500, a global stock market rout, led by continued concerns about China, and a wave of panicked sell orders in the U.S. pre-market that day sent U.S. stocks plunging when trading opened.
The widely watched Dow Jones Industrial Average plummeted nearly 1,100 points early Monday morning, the biggest one-day point loss in history, even as the then 6.6% drop was a far cry from Black Monday’s (October 19, 1987) 22.6% debacle, before recovering to close down some 588 points, or 3.6%.
Meanwhile, the S&P 500 index skidded more than 5% to as low as 1867 shortly after trading opened on Monday, with that level hit again at the close of trading on Tuesday, when that day’s big early rally gave way to a massive downturn in the final hour of trading. Considering that the S&P closed at 2130.82 on May 21, 2015, the 250-some-odd-point plunge as of Tuesday evening amounted to a setback of 12.35% from the high, pushing the index well into correction territory for the first time since October 2011.
Certainly, the speed of the decline was disconcerting, even as the magnitude of the setback was very much normal, assuming that market history is a guide. As we’ve been saying in this space for quite some time, selloff, downturns, corrections and even Bear Markets are always part of the investment process, with drops of 10% occurring every 10 months or so on average and declines of 12.5% happening every 14 months or so (S&P 500- Price return. See chart below).
Keeping in mind Warren Buffett’s admonition, “As far as I am concerned, the stock market doesn’t exist, it is only there as a reference to see if anybody is offering to do anything foolish,” we remained tranquil throughout the drama, just as we were during previous market turmoil in 1987, 1990, 1994, 1998, 2000, 2001, 2007, 2008, 2009 and 2011. Of course, we were busy looking at a host of names into which we might deploy some of the modest cash we have been accumulating, especially as some of the declines in individual stocks were staggering, as the table below of recoveries off of the early-week lows in 25 of our favored stocks illustrates.
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