AMERICAN investors were seriously woken up when the Dow Jones industrial average tumbled 1,000 points minutes after the market opened on Monday, Aug. 24 in a worldwide wave of selling following a historic plunge in Chinese stocks.
The industrial average closed with a loss of about 588 points, down about 3.6 percent.
Though the declines eased significantly as the day went on, the market plunge sent a shiver of fear through Americans with retirement accounts or who are saving to buy a home over the bull market.
The average has dropped more than 9 percent in the last week, and has lost about 12 percent from its record high of 18,312.39 set on May 19, putting it in the “correction territory” of a decline of 10 percent or more after opening.
The last market correction was four years ago. Treasuries surged as investors bought less risky assets.
The Dow fell 1,089 points within the first four minutes of trading, as traders dumped their shares. But the “fire sale” was short-lived. A wave buying cut the Dow’s losses by half just five minutes later.
Heightened concern about a slowdown in China had already shaken markets around the world on Friday, driving the US stock market sharply lower. The collapse continued Monday, as China’s main stock index sank 8.5 percent.
The prospect of a slowdown in the world’s second-largest economy has left investors unsure of how to measure which companies might be a good investment.
Among the market’s leading stocks, Apple Inc. fell 5.6 percent to $99.88 a share, before recovering with a 1.7 percent gain in midday trading; General Electric Co. was down 4.9 percent at $23.39 before cutting its loss to about 40 cents; and 1.7 percent. Netflix Inc. plummeted 10.8 percent to $93.15 a share, before reversing the trend to gain 3.6 percent to about $107.50.
The US market slide was broad. The 10 sectors in the broader Standard & Poor’s 500 index (a measure of how much investors are willing to pay for each dollar of company earnings) headed lower, with energy stocks scoring the biggest decline.
US stocks have been primed for a sell-off for several months, said Jim Paulsen, chief investment strategist and economist for Wells Capital Management.
“I’ve been of the view since late last year that this market is in a vulnerable position,” Paulsen added. “It’s gone almost straight up for six years.”
Chris Hardt, a financial advisor at Edward Jones, has been telling clients that Monday morning’s pullback is not unusual.
“The market will pull back 10 percent about once a year on average,” he said. “This is a normal thing.”
Stocks have been on a bull run of more for more than six years, after bottoming out in March 2009 in the aftermath of the financial crisis and the Great Recession.
Oil prices, commodities and the currencies of many developing countries also tumbled Monday on concerns that a sharp slowdown in China might hurt economic growth around the globe.
“We’re in a volatile market, and these pullbacks are going to occur for reasons,” said private wealth advisor Michael Kaningher. “The reason today is China. Before, you could insert Greece and talk about the same problems. Right now, the market seems to be doing well, and definitely not on a path to a recession.”
Benchmark US crude dropped $1.41 (3.5 percent) to $39.03 a barrel in New York. It fell to 87 cents a barrel on Friday. Brent crude, a benchmark for international oils used by many US refineries, fell $2.50 to $42.96 a barrel.
However, experts say a big slump in commodity prices could turn out to be a boost for economies worldwide.
“Everyone is getting the equivalent of a massive tax cut,” said Paulsen. “This is more of a stimulative event for the global economy.”
US and foreign stocks again followed a massive sell-off in China amid growing worries about China’s economic slump, and the ripple effect it could have on corporations worldwide that do business with China.
“China’s emerging middle class has taken on huge quantities of private debt in recent years to buy everything from real estate to stocks,” said Cornell Law School professor Robert Hockett, whose expertise is monetary law. “The result has been a sequence of classic credit-fueled asset price bubbles much like those experienced by the US in the 1920s and early 2000s.
“Now that asset prices have leveled off and reversed, millions of Chinese are faced with the prospect of owing more on their debts than their assets are worth–just like US investors and homeowners before them,” he continued.
Underlying the economic gloom in China is the growing conviction that policymakers and regulators may lack the means to stem the losses in that nation. The country is facing a slowdown in fiscal growth, the banking system is short of cash and investors are pulling money out of the country, experts note.
“There is a lot of fear in the markets,” said Bernard Aw, market strategist at IG.
In currency trading, the dollar was at 119.25 yen on Monday, down from 122.05 yen on Friday. The euro rose to $1.1532 from $1.1138. Currencies fell hard in developing economies — particularly those that rely heavily on the export of commodities and oil, both of which China is a big consumer.
“Today’s stock market drops worldwide afford further evidence that the past decade has been China’s ‘Roaring ‘20s’–and that the chickens are now coming home to roost,” Professor Hockett added.
China’s central bank announced it was cutting its benchmark interest rate to foster more lending, and has pumped more than $23 billion into its financial system to increase liquidity in the market.
On Tuesday, Aug. 25, the Dow average soared about 400 points in early trading as US markets ignored another sell-off in China and surged higher, partly reversing a severe drop over the prior three sessions.
The blue-chip Dow Jones index jumped 402.70 points (2.5%) in morning trading, after plunging 8.5% over the last few sessions. All 30 of the component stocks were higher. (With reports from the Los Angeles Times, Associated Press)
