Another swoon on Wall Street, as the world adjusts to life without QE


Traders work Monday on the floor of the New York Stock Exchange. (Brendan Mcdermid/Reuters)

U.S. stock markets continued a dreary 2014 with another broad decline as investors hedged against the possibility that the economic recovery is on shaky ground.

Major indexes in the United States are down between 4 and 7 percent for the year, a performance tracked by markets in Europe, Asia and elsewhere in a worldwide bout of uncertainty.

The Dow Jones industrial average, the S&P 500-stock index and the Nasdaq each fell more than 2 percent on the day — a gloomy welcome for Federal Reserve Chairman Janet L. Yellen on her first day as the world’s most powerful central banker. The sell-off continued in Asian markets early Tuesday, with the benchmark Nikkei 225 closing its morning session down 2.6 percent.

The declines on Wall Street and in other major trading centers come at a delicate time for U.S. and world economies. The Fed has begun reducing one of the main programs it used to support the economy following the 2008 crisis — leaving investors guessing about how the transition to more normal monetary policy will work and what weaknesses it might expose in countries or companies that have become dependent on easy money.

At the same time, the fast-
growing nations of the developing world have been knocked down a peg, buffeted by political crises, slowing growth, high inflation and an assortment of other problems.

Add it up, and investors have become quick to pull money out of stocks — locking in profits from the broad rise in equities over the past two years, or putting money aside until it becomes clear how the Fed’s new order will work and that the problems in developing countries won’t turn into a larger financial crisis.

“What has changed?” wrote Markus Schomer, chief economist at PineBridge Investments. “The spreading troubles in emerging markets. . . . A disappointing U.S. jobs report at the start of the year. . . . Deteriorating business surveys in China. . . . The start of Fed tapering has removed the safety blanket.”

The immediate trigger of Monday’s sell-off was a report from the Institute for Supply Management that showed a sharp decline in sentiment among corporate purchasing managers about the direction of the U.S. manufacturing sector and the economy overall.

It is perhaps a measure of how much expectations have improved recently in the United States that the survey prompted such selling even as it indicated that an economic expansion is still underway.

The most recent purchasing managers index remained at 51.3, above the level of 50 that indicates the economy is growing. But that was well below the strong results that came at the end of last year, casting some doubt on the pace, and perhaps the durability, of U.S. economic growth.

At the close of trading, the Dow flashed red across the board, with 29 of its 30 benchmark companies losing ground.

The question now is whether the bad beginning to 2014 is a sign of developing economic weakness, or a reasonable and perhaps healthy adjustment after a banner year for stock markets.

Given the big gains in markets last year, it is not surprising that investors have become suddenly cautious, Wells Fargo economist Gary Thayer wrote in a Monday analysis.

“A correction in the U.S. stock market was probably overdue,” Thayer said. U.S. stocks are “not as undervalued as they were a year ago,” and a continued fast rise in markets is considered unlikely.

The Dow rose 26 percent over 2013, and the S&P 500 was up nearly 30 percent. Even with this year’s declines, both are well above where they were a year ago, as U.S. growth continues to trudge along at a reasonable pace .

Results from the purchasing managers survey in particular may prove only a temporary dip. Analysts said the decline in that index was probably a result of the fact that business inventories grew rapidly last year — likely prompting purchasing managers to cut back — and also by the winter storm that shut down parts of the country in January.

“The U.S. equity market is likely to resume its long-term upward trend in a couple of months after the current period of concern,” Thayer wrote.

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