U.S. Stock Plunge Picks Up Speed
Ugly week ends with worst day for the Dow and other indexes in years
U.S. stocks suffered their worst losses in four years at the end of a bruising week, as growing concern about China’s economy pushed shares in the U.S. and Europe into what money managers call a correction.
The Dow Jones Industrial Average finished the day down 10.1% from its May record, crossing the 10% threshold that typically defines a correction. The U.S. blue-chip stock average hadn’t had a correction since 2011, when it plunged after Standard & Poor’s downgraded its rating of U.S. sovereign debt.
On Friday, the Dow endured its fourth consecutive day of declines, losing 530.94 points, or 3.1%, to finish at 16459.75. Other U.S. indexes similarly fell sharply, with the Dow, the S&P 500 and the Nasdaq Composite Index all posting their worst one-day percentage declines since 2011, although the S&P 500 and the Nasdaq weren’t down 10% from their highs. Benchmark indexes in London and Frankfurt recorded their largest two-week percentage declines since 2011, leaving both of those markets well into correction territory.
Four years ago, intervention by the world’s central banks prevented recession and kept many stock benchmarks from slipping into a bear market, which is commonly defined as a decline of 20% or more. Many money managers and economists say they expect central banks to again prevent deeper troubles through efforts they already have under way. But while market watchers remain optimistic for the longer term, they worry stocks could face a rocky path in the near future.
Other notable markers across financial markets Friday:
Stock indexes in France, Spain, Belgium and the Netherlands fell into correction territory.
Of the 502 U.S. stocks in the S&P 500 index, 492 fell, leaving 328 in correction territory. Of those losers, 147 have fallen into bear-market territory.
Shares of Apple Inc. entered a bear market, down 20% from their recent high.
The CBOE Volatility Index, known as the market’s “fear gauge,” more than doubled in the past week, its biggest weekly increase on record.
Allen Sinai, chief global economist at Decision Economics Inc., told clients this past week he is bullish on stocks in the medium and long term because he expects continuing economic expansion world-wide. But he said he is waving a “yellow flag of caution” for the short term.“
Tactically, I would not commit new money to stocks at this time, and I would raise cash,” Mr. Sinai said in an interview. “To get out of stocks entirely would be a big mistake, but I would lighten up,” he said, although he added that he would be surprised to see U.S. stocks fall more than 15% in all.
The worries were evident across the globe, both Friday and in the days before.
Stocks fell 5.3% for the week in Tokyo, 12% in Shanghai, 5.5% in London and 7.8% in Frankfurt. The S&P 500 fell 3.2% Friday and 5.8% on the week, while the Nasdaq Composite Index declined 3.5% Friday and 6.8% for the week. The S&P is 7.5% off its May record, still well short of a correction, but the Nasdaq is 9.8% off its July record.
Amid concerns Chinese demand for commodities will decline, New York oil futures fell 6.2% on the week to $40.45 a barrel, the lowest price since 2009. During intraday trading Friday, oil dipped below $40 a barrel.
A big part of the problem is that China, the world’s second-largest economy, is a black box to most money managers because the government’s tight rein gives them little idea what is really happening inside its economy.
Another element is continuing concern about whether the U.S. Federal Reserve will go ahead with plans to raise its target interest rate at its next policy meeting, Sept. 16 and 17.
A third worry is that big-company earnings, which will begin to be reported in about three weeks, could be damaged by the uncertain economy and the strong dollar, which makes U.S. exports more expensive.
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