The stock market ended July with the sharpest decline in the Standard & Poor’s 500-stock index since April, while the Dow Jones industrial index fell more than 300 points, enough to eliminate all of its gains for the year.
The reasons for the losses on Thursday were not entirely clear. Disappointing earnings reports by a few major companies, Argentina’s apparent default on its debt and fears about the conflicts in Ukraine and the Middle East may all have been part of it. And relatively strong economic reports in the United States this week may have caused concern among traders that the Federal Reserve might tighten its expansive monetary policy.
But whatever the causes of the decline, it wasn’t entirely unexpected, and the reaction of several strategists was fairly upbeat.
Several assessed it this way: The market fell by 2 percent in one day? It’s about time.
“I think it’s healthy and normal at this stage of the monetary cycle,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “After the run-up in the market we’ve had until now, I’d expect that we’d have a real correction. Whether this is the beginning of one, I don’t know, but I think it would be very healthy to have one. And a decline like this one? It’s O.K. to have it.”
By themselves, the major market measures looked ugly, however. The Dow Jones industrial average fell 317.06 points, or 1.88 percent, to close at 16,563.30, which put it into negative territory for 2014. The Nasdaq composite index lost 93.13 points, or 2.09 percent, to 4,369.77; that technology-laden index remained up 4.63 percent for the year. And the S.&.P. 500 fell 39.40 points, or 2 percent, to 1,930.67; even with that loss, the S.&.P. 500, a barometer of the broad large-capitalization stock market, remained up 4.45 percent for the year.
Still, if the precipitate drop of the major indexes seemed startling, it may have been because the market has been preternaturally calm for a very long time. The last time the S.&P. fell that much on a percentage basis was in April, according to Paul Hickey, co-founder of the Bespoke Investment Group.
In addition, he said, daily moves in that index had averaged only 0.35 percent in July, an unusually low level last seen in early 2007.
And the VIX (officially, the Chicago Board Options Exchange Volatility Index), a widely followed measure of market swings that is sometimes referred to as the fear index, jumped to 16.95 Thursday, up from 13.33 on Wednesday.
Even at Thursday’s level, though, it remained very ordinary on a historical basis: The average level of the VIX since March 1990 is 16.95, the very level reached Thursday afternoon. Over all — at least until now — it has been an extraordinarily calm market.
It’s also been a buoyant one. Since the start of the bull market in March 2009, the S.&P. 500 gained more than 224 percent, including dividends, through last Friday, according to Bloomberg data. Yet there has not been a market correction — typically, a decline of at least 10 percent — since 2012.
With that backdrop, Thursday’s market fall, abrupt as it may have seemed, doesn’t really amount to much in itself, several analysts said. Much bigger declines tend to occur with some frequency, even in rising markets, noted James W. Paulsen, chief investment strategist at Wells Capital Management.
“You can definitely say that we are long overdue for a drop like the one we had,” he said. “What may be happening is that what’s good news on Main Street is no longer good news on Wall Street, that we’re having a divergence, and the market has to get used to that.”
He noted that Wednesday’s report that the gross domestic product in the second quarter rose 4 percent — news that would help most people in the country — may not be viewed as entirely positive on Wall Street, because it could augur an earlier end than expected to the Federal Reserve’s stimulative monetary policy. The Fed said on Wednesday that it would continue its well-telegraphed policy of tapering bond purchases, while holding short-term interest rates low, but Mr. Paulsen said that may not matter for the markets.
Bond yields remain very low, and despite the sell-off in stocks, the bond market was calm and interest rates were stable. The yield on the Treasury’s 10-year note was unchanged at 2.56 percent, while its price slipped 1/32, to 99 15/32.
That yield is less than half its 50-year average, according to Bloomberg figures.
If it becomes evident that the economy is picking up speed, Mr. Paulsen said, “There will have to be some market recalibration. It’s possible that’s what we’re seeing the start of — and interest rates will rise a bit, and the stock market will be turbulent. But of course we don’t really know.”
Poor earnings reports by Samsung Electronics, Lufthansa, Adidas and Kraft Foods didn’t help stock prices on Thursday. In aggregate, however, corporate earnings have been quite strong, according to Thomson Reuters I/B/E/S, which estimated that second-quarter earnings per share in the United States will end up rising 7 percent. With 71 percent of the S.&.P. 500 companies reporting, 68.1 percent have beat consensus expectations, compared with only 63 percent in a typical quarter since 1994. That’s not a bad record, and it wouldn’t seem to be enough to drive down the market.
Sometimes market declines are simply irrational, even if they’re not unexpected, said Richard Bernstein, formerly the chief investment strategist at Merrill Lynch and now the proprietor of his own firm and a fund manager for Eaton Vance.
“People have heard a lot about the possibility that we’re on the precipice of a correction, and they’ve gotten a little jittery,” he said. “That happens sometimes when there’s a confluence of geopolitical and economic factors, and people are on edge. But I’ve been bullish and I remain so. We’ll just have to find out in the weeks ahead who’s right and who’s wrong.”