Fear drove Wall Street to one of its most dramatic days in years yesterday.
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 US 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 three years ago, could see its government collapse next year, putting a crucial bailout programme in danger.
A series of worrying economic news in the US also fuelled the selling.
Traders sold riskier investments and moved money into US government bonds, gold and cash.
By the end of the day, the Dow Jones industrial average lost 173.45 points, or 1%, to 16,141.74. The Standard & Poor’s 500 index lost 15.21 points, or 0.8%, to 1,862.49 and the Nasdaq composite dropped 11.85 points, or 0.3%, to 4,215.32
The yield on the benchmark US 10-year note fell from 2.20% to below 1.91%. By the end of the day, it pulled back to a yield of 2.14%. The yield on bonds moves in the opposite direction of prices.
“It typically takes weeks for 10-year Treasurys to move 29 basis 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.”
Mr Stone said he thought the plunge in bond yields probably 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% 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 US market has also not had a correction, a technical term for when a stock or index falls 10% or more, in more than three years. Historically a correction happens every 18 months.
Yesterday’s slide brings the market closer to that long-predicted but elusive correction.
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.
It is not the US economy that investors are worried about, at least not yet. It is 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 US economy remains in recovery mode. US employers are hiring at the strongest pace in 15 years.
The economy expanded at a 4.6% annual rate in the April-June quarter and most economists forecast growth will be a healthy 3% this year and next.
The concern is that weakness globally will infect the US economy and hurt corporate profits. Companies in the S&P 500 index generate a little less than half their sales outside the US.
In overseas markets, traders also purged their investments on concerns Europe might relapse into a recession. France’s CAC 40 index sank 3.6% and Germany’s DAX lost 2.9%. Britain’s FTSE 100 fell 2.8%.
Investors got discouraging US economic news early yesterday, when the commerce department reported that retail sales declined 0.3% in September from the previous month. Purchases of cars, petrol, furniture and clothing slowed.
The Federal Reserve Bank of New York’s Empire State Manufacturing index dropped sharply from 27.5 to 6.2 in October as new orders shrank and shipments barely rose. The latest reading marks the slowest pace of growth in six months.
Eight out of the 10 sectors in the S&P 500 declined. Financial stocks were the biggest decliners, sliding 2.1%. Financial stocks typically do poorly when investors expect a recession, because more borrowers are likely to default on their loans.
Bank of America fell 76 cents, or 4.6%, to 15.76 dollars. JPMorgan Chase fell $2.46, or 4.2%, to 55.53 dollars and Citigroup lost $1.79, or 3.5%, to $49.68.
Homebuilders surged, getting a lift from the slide in the 10-year Treasury bond yield, which affects rate on consumer and business loans. A decline in the 10-year Treasury note yield should nudge mortgage rates lower, spurring home sales.
The price of oil continued to fall to new lows yesterday. Benchmark US crude fell 6 cents to close at $81.78 a barrel on the New York Mercantile Exchange.
Brent crude, a benchmark for international oils used by many US refineries, fell 99 cents to close at $83.78 on the ICE Futures exchange in London. Brent is at its lowest level since November of 2010.