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Stock prices around the world continued to plunge, threatening to end one of the longest bull runs in the history of the United States stock market.
A searing six-year rally in United States stocks had advanced into the summer months, shrugging off challenges like the dispute over Greece's debt that nearly led to the country crashing out of the euro. But in the last two weeks, world markets tumbled as investors grew increasingly concerned about economic conditions in China, which unexpectedly devalued its currency last week, and the outlook for the economies of other large developing countries.
As the selling accelerated, some benchmark indexes were at or near 10 per cent below their recent peaks - a "correction" in Wall Street parlance. "This is likely going to go down as the first meaningful correction in four years," said David Rosenberg, an economist and strategist at Gluskin Sheff.
Sell-offs in the financial markets need not cause harm in the real economy. In many cases in the postwar period, the United States stock market has recovered after reacting negatively to problems overseas. Strong employment numbers and other economic indicators suggest that the US economy remains resilient.
Still, fear in financial markets can feed on itself. The declines in the markets are coming not only as China struggles, but also as the Federal Reserve is winding down its huge stimulus efforts. Trillions of dollars of cheap money from the Fed has fueled economic growth and helped push markets higher around the world. Now, the question is whether the world can stay on the recovery path without Fed's largess.
Such concerns helped push stocks far below the peaks they reached just weeks ago when investors were ebullient. The Dow Jones industrial average is more than 10 per cent below the high it reached in May. At Friday's close, the index was down 530.94 points, to 16,459.75, a loss of 3.1 per cent on the day.
The Standard & Poor's 500-stock index, a broader benchmark, fell below the psychologically important 2,000 mark. It was down 3.2 per cent on the day and more than 7 per cent below its recent peak. It fell 64.84 points, to 1,970.89. The index lost $1.14 trillion in value this week, according to S&P Dow Jones Indices.
The Nasdaq, which contains a lot of technology stocks, fell 3.5 per cent, a slide that takes the index nearly 10 per cent below its latest high. It closed down 171.45 points, to 4,706.04.
The price of oil, as measured by the benchmark United States crude contract in New York, briefly fell below $40 a barrel. Later it was trading at $40.11, nearly 25 per cent below its price at the start of the year. The decline in the price of oil and other commodities may indicate that there is less demand for such commodities because economies are slowing. The fall in oil reduces energy bills for consumers and companies, but it also hammers the profitability of the many oil and gas companies that have invested heavily during the recent shale boom.
The Vix, known as Wall Street's fear gauge, spiked higher than the level it reached last fall, when global markets last sold off on concerns about global growth.
Investors rushed into the relative safety of government bonds. The yield of the 10-year Treasury note fell to 2.05 per cent on Friday, from 2.07 per cent on Thursday.
In the coming days, investors will have to decide whether the selling is part of summer squall that will soon pass - or the start of tougher times for the global economy that could weigh on stock markets for months.
"There is a relatively more ominous slowdown going on in emerging markets - and that's what the trade is all about right now," said Gina C. Martin Adams, an equity strategist at Wells Fargo Securities.
Officials at the Fed will also have to weigh the seriousness of the turbulence in the markets as they decide whether to raise interest rates for the first time in nine years. Raising rates as early as next month, as some investors have expected will happen, could further unnerve investors, damp economic activity and speed the flow of dollars out of developing countries. The central bank may try to estimate the impact of a falling stock market on the wealth and spending habits of US households.
Much, of course, depends on the strength of the Chinese economy - and an economic release could stoke further pessimism. Output in China's manufacturing industry contracted in the first three weeks of August at the fastest pace since the depths of the financial crisis, according to a preliminary reading of the Caixin purchasing managers' index. It came in at 47.1 points for August, compared with 47.8 points in July. The August figure was its lowest reading since March 2009 on a scale in which any figure below 50 indicates contraction.
Markets have grown volatile since China made a surprise move last week to devalue its currency, the renminbi, by the biggest amount since 1994. On Thursday, Vietnam devalued its currency, the dong, while Kazakhstan allowed its currency, the tenge, to float freely, prompting a decline of about 25 per cent.
Since the devaluation, China has moved to keep the renminbi from depreciating further by selling dollars. This effectively takes money out of the financial system, so the central bank has been busy this week trying to add liquidity. On Wednesday, it announced 110 billion renminbi ($17 billion) in new six-month loans to 14 unnamed financial institutions.
©2015 The New York Times News Service
