Is this a Healthy Correction or Something More Ominous?

Global stock markets are pretty much in disarray, and there appears to be nowhere to hide.

China is certainly setting the tone as the Shanghai Composite dropped another 8.5% on Monday (its biggest one-day percentage loss since 2007), and is now trading in the red for the year after being up as high as a whopping 60% for the year. Increasing concerns over the health of China’s economy is widely accepted as the reason for the swift downturn.

In our neck of the woods, the Dow Jones Industrial Average reached a record level within several minutes of the opening of trading Monday, as it dropped an unfathomable 1,089 points, a one-day record. The market has since rebounded somewhat, trading under 200 points down at 12:10 ET.

So, what are some on the Street saying?

“The external shock to the market from China may or may not have legs,” Mike Englund, Principal Director and Chief Economist for Action Economics said.

Englund sees recent market declines with events in China as part of the market instability that might have been expected in the run-up to the start of Fed tightening. “People are now faster to believe that the stock market is reflecting a bubble that can be popped,” he said.

So what’s an investor to do?

“For those thinking about making drastic changes to your long-term investment plan in anticipation of the market slipping into either another correction or even a new bear market, let me remind you of two of my favorite sayings,” Sam Stovall, U.S. Equity Strategist at S&P Capital IQ chimed.

“It is usually better to buy than bail, and whenever I try to jump the gun, I usually end up shooting myself in the foot,” he noted.

Regarding the S&P 500, Stovall notes that there have been 90 declines of 5% or more since WWII, excluding this one. Of these, 59 (66%) were pullbacks. In addition, there have been 19 (22%) corrections. They required five months to unfold, but only four months to get back to breakeven.

“So by the time you talked yourself (or an investor talked to their financial advisor) into restructuring their overall portfolio to prepare for the possibility of another 2008 mega-meltdown, the market would already likely be on its way toward getting back to break-even,” stated Stovall.

Where do we go from here?

“The recent rapid decline in the U.S equity market, as well as other markets around the world have investors wondering if the current six plus year old bull market for U.S. stocks is coming to an end. Our base case is that the bull market is not over,” Michael Gibbs, Director of Equity Portfolio & Technical Strategy at Raymond James said.

Gibbs does agree however, that if the current market fears regarding global growth are realized, and many economies in the world fall into recession, the odds of a bear market will become very likely.

“For now, the current selloff will likely find a bottom and a counter trend rally should occur. The level the market reaches during the rally phase, and the type of additional data points that develop, will chart the course of this current bull market,” he said.

Englund has a “wait-and-see” approach.

“Contagion from China to the U.S. will largely occur via the global environment of financial panic that is now depressing U.S. stock prices and that may delay Fed tightening, though we would refrain from extrapolating daily swings in the market’s risk-on/risk-off appetite as far as a month,” England notes.

“The question is whether the current market tone is in place during the September 16-17 meeting.”