Wall Street is taking a breather today from its stunning meltdown that some market watchers fear could sink blue chips back to 10,650 as soon as summertime.
The shaky markets, which are closed for the Martin Luther King Jr. holiday, are on the brink of pushing the Dow Jones industrial average into 11,000 territory this week – with the possibility of Dow 10,000 looming.
For the week, the Dow closed at 12,099.30, off 4 percent and 8.8 percent for 2008. The S&P 500 is doing even worse; the index is down 9.8 percent for the year, its sorriest-ever start, at 1,325.19. The tech-heavy Nasdaq composite index lost 4.1 percent last week to 2,340.02. For the year, the Nasdaq is off a budget-busting 11.8 percent.
In the search for a bottom of the current correction – with markets down 10 percent in just three weeks – analysts are citing historical averages in the last half-century when discussing bear markets and the economic recessions that follow them.
Based on those analyses, gloomy periods have lasted about 16 months and bring a 24 percent correction in stock prices, analysts say.
That means that based on data showing at least three months of a bear market since the slowdown began in September, the downward spiral could persist through December.
By that time, according to Wall Street’s law of averages, the Dow could be bottoming out at 10,650 – just about where it stood shortly after the infamous dot-com bubble popped in early 2000, toppling the Dow from an all-time high of 12,000. It also triggered the recession of 2000-01.
A growing chorus of market watchers say stocks have been overpriced for too long in the seven-year bull market, with a psychology gaining steam for a house cleaning.
“We’re so used to the bubble world where everyone repays loans and stocks always go up and everyone makes a lot of money,” said Joseph Mason, a market authority and business professor at the Wharton School and Drexel University.
“We’ve forgotten about the real world. Everyone under 37 doesn’t know what a down market is.”
Others say some investors are already preparing to take their lumps now in hopes of a better trading world in another year.
“I can see the Dow approaching 10,600, but I seriously doubt it would go below that,” said Anthony Sabino, a business professor at St. John’s University. “A recession is due – there’s been too much artificial growth and too much loose money and credit.
“People [are] facing up to the fact that it’s long overdue, but necessary in order to feel better again,” he said.