Wall Street plunged for a second-straight day, forcing all three major U.S. averages to give up their 2015 gains and causing the Dow to easily enter correction territory.
The Dow Jones Industrial Average tumbled 530 points, or 3.11% to 16462. The S&P 500 shed 64 points, or 3.17% to 1971, while the Nasdaq plunged 171 points, or 3.52% to 4706.
Technology and energy stocks took the biggest hit during the session, with the respective sectors dropping 4.21% and 3.48%.
The intense selloff on Wall Street forced the Dow and S&P to shed almost 6% for the week, with the Nasdaq declining nearly 7% for the week, as traders across the globe worried about sustained weakness in China. A report on Chinese manufacturing showed activity shrank at the fastest pace in 6-1/2 years – evidence that the world’s second-largest economy could be in for a sudden slowdown.
“The dismal manufacturing figures from China leaves the door open for more devaluing of the yuan. Throughout the past year, China has been very aggressive in its stimulus schemes, but they still aren’t enough to sustain high levels of growth,” David Madden, IG market analyst, said in a note. “The only option for Beijing will be additional monetary easing which will effectively put the brakes on the U.S. recovery.”
The intensified worries about China’s economy came after the latest meeting minutes from the Federal Reserve showed central bankers in the U.S. were more cautious about when to hike short-term interest rates for the first time since cutting them during the 2008 financial crisis.
Speculation on Wall Street had been for the first hike to come at the Fed’s next meeting in September, but increased worries about the persistent low inflation in the country could push that timeline back to December, or possibly even into 2016.
“The moment Yellen drew the line in the sand that rates will move this year, almost to the day, that’s when markets started their move lower,” Peter Kenny, chief investment strategist at Clearpool Group, said. “That’s the parallel story that’s driving the reorder of asset allocations away from risk.”
On the largest volume day so far this year, as the selloff gained momentum, so did investor anxiety. The CBOE VIX Index, Wall Street’s so-called fear gauge, surged 118% for the week, the biggest weekly gain ever, and the highest close in nearly four years.
In a sign of the breadth of the selloff, U.S. stocks shed nearly $1 trillion in market cap since the move lower began on Tuesday. On Thursday alone, U.S. equities lost some $475 billion in market value before shedding $562 billion on Friday, according to the Dow Jones U.S. Total Stock Market Index. Selling pressure that intense, causing the DJIA to drop more than 300 points for two-consecutive sessions, hasn’t happened since November 20, 2008, the height of the U.S. financial crisis.
Kenny said for investors the question now is when does the freefall stop?
“Very few investors see this pullback coming to a sharp conclusion anytime soon,” he said. “We haven’t had a 10% correction this year, and this will likely be it.”
He continued that while the selloff is China centric to an extent, there are also a lot of other factors weighing on sentiment.
“Concern over global growth is number one. Number two is the impact that will have on emerging currency wars, and that’s why this is a global story, not a U.S. equity story,” he explained. “All of this is leading investors to take money off the table in riskier assets due to extended valuations, with the prospect that in the not-too-distant future, there is the likelihood that the Fed will move on rates.”
Kenny said investors could see a reflexive rally in the next couple of weeks as the market looks to recalibrate itself – and as far as he’s concerned, though the major averages could slip into correction territory, it doesn’t look to spell the end of the market’s bull run. At least not yet.
“It’s in the process of a therapeutic long-overdue pullback,” he said. “The end of the bull run would fly in the face of history since our economy is growing, employment trends have been rock solid for many quarters, we’re at multi-year lows in terms of the unemployment rate, we have gains in wages, lower energy costs – which should help consumer spending --, record amount of cash on balance sheets that can be used for repurchase, and consumer confidence at multi-year highs.”
Not Limited to Equities
The selling wasn’t just limited to equities on Friday. Crude oil prices plunged again to fresh 6-1/2 year lows extending their declines to ten-straight weeks. U.S. prices dropped 2.11% to $40.32 a barrel. Brent, the international declined 2.49% to $45.26 a barrel.
U.S. crude prices briefly dipped below the psychologically-significant $40 a barrel mark in midday action.
The energy sector declined 2.15% during the session, with major names like Exxon (NYSE:XOM) and Chevron (NYSE:CVX) falling more than 1%.
Elsewhere in commodities, silver declined 1.43% to $15.34 a pound, while copper slid 0.63% to $2.30 a pound.
Gold was one of the few slivers of green on a down day as traders sought a safe haven. Gold traded up 0.33% to $1,157 a troy ounce. Meanwhile, the yield on the U.S. 10-year Treasury bond fell 0.034 percentage point to 2.050%.
In currencies, the euro traded up 1.04% against the U.S. dollar.
Global economic growth concerns also plagued overseas markets. In Europe, the Euro Stoxx 50, which tracks large-cap companies in the eurozone plunged 2.84%. The German Dax dropped 2.55%, while the French CAC 40 plummeted 2.80%, and the UK’s FTSE 100 shed 2.43%.
After weak data overnight, China’s Shanghai Composite index dropped 4.27%, and ignited more selling in Asia markets. Hong Kong’s Hang Seng declined 1.53%, while Japan’s Nikkei fell 2.98%.