Yesterday's market tumble finally brought the S&P and Nasdaq alongside the Dow Jones into correction territory, send the broader index down 11% from its highs, even as a vast majority of S&P constituents already preceded the index and are either in correction or in bear market territory. And yet, following today's latest central bank intervention, this time in the long overdue Chinese interest rate cut (which will hardly have a lasting impact on either the economy or stock markets), the S&P correction may may prove to be short lived: S&P is poised to open about 4% higher, delivering the latest "Bullard" moment to the S&P, this time courtesy of China.
Still, the question remains: was that it for the long overdue correction, and what comes next.
One suggestion comes from Goldman, which looks at the today's market and the raging EM crisis, and compares the S&P to 1998, which it hopes will serve as the anchor pair until the end of the year.
This is what Goldman's David Kostin says:
S&P 500 has corrected for the first time in three years, declining by 11% from its May record high. Concern about China economic growth was the immediate catalyst for the correction. We expect the US economy will avoid contagion and continue to expand. S&P 500 will rise by 11% to reach 2100 at year-end. Such a rebound would echo the trading pattern exhibited in 1998 when US equities rallied and largely ignored the Asian financial crisis.
Some more details from Goldman:
...MOREThe S&P 500 retreated by 10% during the past seven days and has dropped by 11% since reaching an all-time high in May. Weakness across emerging markets is the leading culprit. Last week China’s flash PMI registered its lowest reading during the last six years leading investors to expect that the PBoC would cut interest rates. When this failed to materialize, the Shanghai Composite index fell by 9% on Monday. The Shanghai index has plummeted by 38% since June.
We believe the US economy will avoid recession in 2016. However, investors are concerned that the drop in commodity prices during the past year, the nearly 40% collapse in China equity prices during the past two months, and economic and FX weakness across many emerging markets will serve as a drag on US growth. The risk of potential contagion from a slowdown in China has prompted an 11% correction in the S&P 500 index for the first time since 2012.
A similar correction occurred in 1998 before the market rebounded. S&P 500 plunged by 14% during August 1998 before rallying by 29% during the last four months of the year. Admittedly, it was a different time and place in that emerging markets contributed a smaller share of global GDP than today, the US was in the midst of what was later to become the Tech bubble, and the Fed cut interest rates 3 times in response to financial markets that were reeling from Russia’s default on its sovereign debt and the collapse of the Long-term Capital Management (LTCM) hedge fund....