NEW YORK (AP) — It’s really not so bad.
Sure, the stock market is down nearly 5 percent since May 21, the day before the Federal Reserve first said it could begin pulling back its economic stimulus.
Yet the sell-off could ultimately represent nothing more than a hiccup. The market is in the midst of a bull run that began in March 2009, and it has endured sharper declines several times since the rally began. Every time, stocks have recovered.
Investors have reason to feel confident stocks can bounce back yet again. The economy is gradually improving and corporate earnings are setting records. Those factors drive stocks higher.
“It’s just a bump along the road, and these levels represent a buying opportunity,” said Peter Cardillo, Chief Market Economist at Rockwell Global Capital. “By the end of the year we will be much higher.”
The 4.6 percent sell-off from the S&P 500’s May 21 record close of 1,669.16 doesn’t even qualify as a pullback — defined as a slump from peak to trough of 5 percent to 9 percent.
This week was a rough one in the wake of the Fed saying on Wednesday it would aim to turn off its stimulus spigot by the middle of next year as long as the economy is strong enough.
After a two-day plunge, stocks ended the week with an advance on Friday, suggesting that Wall Street may be successfully weaned from the Federal Reserve’s easy money after all.
“Saner heads are prevailing,” said Jim Dunigan, chief investment officer at PNC Wealth Management. “People are looking a little deeper into the message from the Fed — the economy is getting better,” he said. “At the end of the day that’s a positive.”
The Fed’s move also pushed up the yield on the 10-year Treasury note to the highest level in almost two years as investors bet that U.S. interest rates will rise.
Investors had known that sooner or later the Fed would quit spending $85 billion per month pumping money into the U.S. economy.
That money has been a big driver behind the stock market’s bull run the last four years. It led to low interest rates that encouraged borrowing.
With the economy improving, the Fed met this week and said it was considering a timeline that could end its bond buying by mid-2014. But just because investors knew it was coming didn’t mean they liked it. The Dow dropped 560 points on Wednesday and Thursday.
Investors recovered their mojo on Friday. The Dow rose 41.08 points to close at 14,799.40. The S&P index rose 4.24 points to close at 1,592.43.
Since bottoming out at a low of 676.53 after the financial crisis, the S&P 500 index has climbed 135 percent. During that stretch it had six pullbacks and two corrections — losses of 10 percent or greater. The index has yet to slip into a bear market, a drop of 20 percent or more.
The first big wobble in the rally started April 23, 2010, when concerns about the European debt crisis unsettled investors. By July 2, the S&P 500 index had fallen 194.70 points, or 15.9 percent, to 1,022.58.
The next big interruption to the stock market’s rise came a year later when the index fell by 245.79 points, or 18.3 percent, between July 22 and October 3, 2011. The catalyst was a tussle between U.S. lawmakers in Washington over extending the debt ceiling. The fight threatened to push the U.S. into default. Investors dumped stocks.
The most recent slump came in the run-up to the November presidential election, when investors worried about the threat of fiscal stalemate and the potential for political gridlock in Washington.
But once investors ultimately learned to live with the discord in Washington, the market resumed its upward surge, climbing almost without interruption to its most recent peak last month. Between Nov. 15 and May 21, the S&P 500 index gained 316 points, or 23 percent.
“If you look at the grand scale of where we’ve come this year, this really is a hiccup,” said JJ Kinahan, chief derivatives strategist at TD Ameritrade, of this week’s sell-off.