Fear rises in stock market as Dow drops 400 points
Fear drove Wall Street to one of its most dramatic, nauseating days in years on Wednesday.
Investors fled stocks and poured into bonds as worries about a global economic slowdown intensified. The Dow Jones industrial average dropped 460 points in afternoon trading, all three U.S. stock indexes were in negative territory for the year, and the so-called fear index spiked.
A late recovery limited the damage and left stocks mostly lower. But investors were shaken after the heaviest day of trading in more than three years.
“I think it’s fair to call it a global growth scare right now,” said Bill Stone, chief investment strategist at PNC Asset Management.
Investor concerns of a worldwide economic slowdown turned into outright fear after weeks of turbulence. Germany, Europe’s biggest economy, is struggling. Greece, a key actor in Europe’ debt crisis, could see its government collapse next year, putting a crucial bailout program in danger. A batch of worrisome economic news in the U.S. also fueled the selling.
Traders sold riskier investments and moved money into U.S. government bonds, gold and cash.
By the end of the day, the Dow Jones industrial average lost 173.45 points, or 1 percent, to 16,141.74. The Standard & Poor’s 500 index fell 15.21 points, or 0.8 percent, to 1,862.49 and the Nasdaq composite dropped 11.85 points, or 0.3 percent, to 4,215.32.
The yield on the benchmark U.S. 10-year note fell from 2.20 percent to below 1.91 percent, a drop of 29 basis points. By the end of the day, it pulled back to a yield of 2.14 percent. The yield on bonds moves in the opposite direction of prices.
“It typically takes weeks for 10-year Treasurys to move 29 basis points,” or 0.29 percentage points, noted Tom Di Galoma, head of fixed income rates in New York at ED&F Man Capital. “Today it moved 29 basis points in 5 minutes.”
Stone said he thought the plunge in bond yields likely played a role in the stock market’s steep drop in early trading.
“I don’t care who you are: to see the 10-year near 2 percent is shocking,” he said.
Investors have grown nervous of a stock market that had pushed ever higher, even in the face of a weakening global economy. The U.S. market has also not had a correction, a technical term for when a stock or index falls 10 percent or more, in more than 3 years. Historically a correction happens every 18 months.
The S&P 500 index is now 7.4 percent below the peak of 2,011.36 it reached on Sept. 18. It would have to close at 1,810.22 or lower to mark a correction.
Wednesday’s slide brings the market closer to that long-predicted but elusive point.
Michael Binger, senior portfolio manager at Gradient Investments, said that investors may have started to step back into the market in the last hour of trading as the S&P 500 approached a drop of close to 10 percent from its record close of Sept. 18.
“The market has been waiting for this 5 to 10 percent correction for quite some time, and we got it,” he said.
Many market watchers say occasional corrections are a healthy phenomenon over the long term and give investors an opportunity to add to their holdings at a lower cost.
“That’s why it’ so important to stay invested at a time like this, rather than think it’s a time to get out,” said Kate Warne, an investment strategist at Edward Jones.
It’s not the U.S. economy that investors are worried about, at least not yet. It’s everyone else. Last week markets sold off sharply after the International Monetary Fund cut its economic forecast for the global economy, noting the weakness in Europe and in Asia.
The U.S. economy remains in recovery mode. U.S. employers are hiring at the strongest pace in 15 years. The economy expanded at a 4.6 percent annual rate in the April-June quarter and most economists forecast growth will be a healthy 3 percent this year and next.
The concern is that weakness globally will infect the U.S. economy and hurt corporate profits. Companies in the S&P 500 index generate a little less than half their sales outside the U.S.
In overseas markets, traders also purged their investments on concerns Europe might relapse into a recession. France’s CAC 40 index sank 3.6 percent and Germany’s DAX lost 2.9 percent. Britain’s FTSE 100 fell 2.8 percent.
Investors got discouraging U.S. economic news early Wednesday, when the Commerce Department reported that retail sales declined 0.3 percent in September from the previous month.