Stocks shed 353 points amid worries over interest rates, slowdown in China
NEW YORK — For investors, there was no place to go on Thursday.
A day after the Federal Reserve roiled Wall Street when it said it could reduce its aggressive economic stimulus program later this year, financial markets around the world plunged. A slowdown in China's manufacturing and reports of a squeeze in the world's second-biggest economy heightened worries.
The global sell-off began in Asia and quickly spread to Europe and then the United States, where the Dow Jones industrial average fell 353 points, wiping out six weeks of gains.
But the damage wasn't just in stocks. Bond prices fell, and the yield on the benchmark 10-year Treasury note rose to 2.42 percent, its highest level since August 2011, although still low by historical standards. Oil and gold also slid.
“People are worried about higher interest rates,” said Robert Pavlik, chief market strategist at Banyan Partners. “Higher rates have the ability to cut across all sectors of the economy.”
The question now is whether the markets' moves are an overreaction or a sign of more volatility to come. What is becoming clearer is that traders and investors are looking for a new equilibrium after a period of ultra-low rates, because of the Fed's bond-buying, which helped spawn one of the great bull markets of all time.
It doesn't mean the stock run-up is over. After all, the S&P 500 is still up 11.4 percent for the year and 135 percent since a recession low in March 2009. But it may suggest the start of a new phase in which the fortunes of the stock market are tied more closely to the fundamentals of the economy.
And that might not be a bad thing. The reason the Fed is pulling back on the bond-buying is because its forecast for the economy is getting brighter.
The job market is improving, corporations are making record profits, and the housing market is recovering.
“People are overreacting a little bit,” said Gene Goldman, head of research at Cetera Financial Group. “It goes back to the fundamentals, the economy is improving.”
The Dow's drop on Thursday — which knocked the average down 2.3 percent to 14,758.32 — was its biggest since November 2011. It happened just three weeks after the blue-chip index reached an all-time high of 15,409. The index has lost 560 points in the past two days, wiping out its gains from May and June
The Standard & Poor's 500 lost 40.74 points, or 2.5 percent, to 1,588.19. It reached a record high last month, peaking at 1,669. The Nasdaq composite fell 78.57 points, or 2.3 percent, to 3,364.63.
Small-company stocks fell more than the rest of the market on Thursday, a sign that investors are aggressively reducing risk. The Russell 2000 index, which includes such stocks, slumped 25.98 points, or 2.6 percent, to 960.52. The index closed at a record high of 999.99 points on Tuesday.
The yield on the 10-year Treasury note rose to 2.42 percent, from 2.35 percent on Wednesday. The yield, which rises as the price of the note falls, surged 0.16 of a percentage point Wednesday with the Fed's comments. As recently as May 3, it was 1.63 percent.
A Fed policy statement and comments from Chairman Ben Bernanke started the selling in stocks and bonds on Wednesday.
Bernanke said the Fed expects to scale back its enormous bond-buying program later this year and end it entirely by mid-2014 if the economy continues to improve.
The bank has been buying $85 billion a month in Treasury and mortgage bonds, a program that has made borrowing cheap for consumers and business. It has helped boost the stock market.
Alec Young, a global equity strategist at S&P Capital IQ, said investors weren't expecting Bernanke to say the program could end so quickly and are adjusting their portfolios in anticipation of higher U.S. interest rates.
“What we're seeing is a pretty significant sea-change in investor strategy,” Young said
For much of the year, the stock market rose with barely an interruption. The S&P 500 climbed for seven consecutive months, from November through May. Investors, fearful of missing out on the rally, pounced on any dips and pushed markets to record highs. On Thursday, those opportunistic buyers were absent. Nobody wanted to stand in the way of the market's slide.
As investors sold stocks, they likely put the proceeds in cash “for fear the deterioration will continue,” said Quincy Krosby, a market strategist at Prudential Financial.
The sharp increase in bond yields prompted investors to sell homebuilders, whose business could be hurt if the pace of home buying slows down. Those stocks fell Thursday.
Markets also were unnerved after manufacturing in China slowed at a faster pace this month as demand weakened. That added to concerns about growth in the world's second-largest economy. A monthly purchasing managers index from HSBC fell to a nine-month low of 48.3 in June. Numbers below 50 indicate a contraction.
A big jump in the overnight lending rate in China unsettled investors, said Brad Reynolds, a financial adviser at LJPR. The rate measures how much banks charge each other to borrow short-term money. The People's Bank of China was forced to pump about 50 billion yuan, about $8 billion, into the Chinese financial system to alleviate the squeeze, Bloomberg News reported.
In currency trading, the dollar rose to 97.34 Japanese yen from 96.54 yen. The euro fell against the dollar, to $1.3197 from $1.3274.
Gold plunged, leading a rout in commodity prices. Gold dropped $87.80, or 6.4 percent, to $1,286.20 an ounce. Silver fell $1.80, or 8.3 percent, to $19.823 an ounce. Both are at their lowest since September 2010.
Traders dumped gold and silver as their appeal as insurance against inflation and a weak dollar faded. Both became less of an issue after the Fed said it was contemplating an end to its bond-buying program.
Oil was swept up in the sell-off. Crude oil had its biggest one-day price drop since November.