US stocks plunge; Dow sinks below correction threshold

The trading floor of the New York Stock Exchange is seen ahead of the closing bell in New York on March 5, 2013. The Dow Jones Industrial Average soared to a record closing high on Tuesday, breaking through levels last seen in 2007 and as investors rushed in to join the party in anticipation of more gains. REUTERS/Brendan McDermid (UNITED STATES – Tags: BUSINESS)

NEW YORK—US stocks plummeted lower on Tuesday, following the rest of the world’s markets down, as investors reacted to fresh news of China’s economic slowdown.

The blue-chip Dow Jones industrial average dropped nearly 3 percent, falling 469.68 points, to 16,058.35, while the broad-based Standard & Poor’s (S&P) 500 index fell 58.33, also about 3 percent, to 1,913.85.

The sell-off of US shares, which appeared to be finding at least a temporary bottom in the morning before slipping further, followed similarly deep slides in European markets.

Germany’s DAX and France’s CAC 40 both dropped nearly 2.5 percent, and Britain’s FTSE fell just over 3 percent. In Asia, China’s Shenzhen market was off 4.6 percent and the Shanghai composite 1.2 percent. Japan’s Nikkei index lost 3.84 percent.

David Schegoleit, managing director of investments for US Bank’s wealth management unit, said the immediate cause of the sell-off was probably the release of new economic data showing a weaker than expected manufacturing climate in China, prompting fears among some investors of a “hard landing” as the Chinese economy decelerates.

Investors also have watched with concern the Chinese government’s fitful attempts to control both its markets and its broader economy.

“The Chinese government has been trying to walk a tightrope,” he said. “It’s wanted to be respected as a world player and economic power, while not wanting to accept the downsides that come with it.”

He noted that major factors fueling investor fears is a lack of confidence in China’s official economic figures and a lack of transparency in its economy and markets generally.

“This is what happens when lack of visibility runs up against fear and stress in the markets,” Schegoleit said.

However, analysts said the sell-off at this point may be an overreaction, particularly given the relative strength of the US recovery.

Marc Pado, president and US market strategist of DowBull Consulting in Lake Tahoe, Nevada, said China has both the will and the ability to keep its economy from slowing too quickly and will do so, even it means creating other problems in the future.

“They’re trying to figure it out,” he said of Chinese leaders. “The key here is, they will figure something out, and we’re overreacting in the meantime.” The main driver of the global slide was the release of China’s official manufacturing purchasing-managers index, which fell to 49.7 in August from 50 a month ago, falling short of market forecasts of 49.8. Investors interpreted the figures as signs of contraction.

That world markets reacted with such force to relatively small moves in a formerly obscure Chinese economic metric showed the degree of anxiety that has gripped investors over the true nature of China’s economic performance and concerns over the ability of the country’s leadership to deal with it.

China has taken a range of extraordinary fiscal, economic and financial measures to reassure investors, with little success so far.

By midmorning Tuesday, the Dow had slipped 11 percent below its May 21 peak, putting the index into what is generally described as a correction, a drop of 10 percent or more. The Dow was off 9.9 percent for the year.

The S&P was off about 9 percent from its May peak and 7.1 percent for the year.

The questions hanging over the markets revolve around the depth of China’s economic troubles and the degree to which the US economy can continue to expand in the midst of sluggish growth around the world.

Russ Koesterich, global chief investment strategist for New York’s BlackRock Inc., noted that the US economy “is now holding up relatively well despite the challenges in China and some other emerging markets.”

Amid the international market turmoil, investors will be paying particular attention to the monthly US employment report for August. The report, scheduled to released by the Commerce Department on Friday, will include nonfarm payrolls, the unemployment rate, average hourly earnings and other data documenting the health of the recovery.

Randy Frederick, Schwab’s managing director of trading and derivatives, called it the “biggest group of reports this month.”

 

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