The U.S. sell-off started last week after the Federal Reserve said it expects to scale back its massive economic stimulus this year. That helped push the volatility index, which measures investor fears, to a six-month high.
The market jitters also were felt in the bond market. The yield on 10-year government bonds jumped as high as 2.66 percent Monday — a level not seen since August 2011. An index of the dollar against six major international currencies traded at almost a two-week high as investors chose the safety of dollar-denominated assets.
“The unwinding of a long period of monetary stimulus is necessarily going to provide a period of high market volatility,” said Kurt Karl, chief economist at Swiss Re. “This will continue.”
Some of Monday’s deep losses were recouped after Federal Reserve Bank of Dallas President Richard Fisher cautioned investors in the afternoon not to overreact to the central bank’s plan to slow bond purchases. The Standard & Poor’s 500-stock index , which had been down more than 2 percent during the day, closed down 1.21 percent, while the Dow Jones industrial average lost 0.94 percent. The Nasdaq fell 1.09 percent. They all are down about 4 percent since last month.
Some market analysts foresee steeper losses — as much as 10 percent — through the end of the month, as investors adjust to the Fed’s potential stimulus tapering.
“There’s a lot of fear out there,” and there is likely to be more market turbulence through the rest of the month, said Mark Lehmann, president and director of equities of JMP Securities. “I bet we are getting close to the end of the extreme selling; we have maybe a day or two more to go.”
The turbulence may continue through the rest of the summer before a period of “slow and modest improvement as markets adjust to the news of a major shift in monetary policy,” Karl said. Stocks may still appreciate 12 percent overall this year, he said.
“These are still healthy gains if you can stand the bumpy ride,” he said.
The day’s losses began after China’s central bank urged banks Sunday to control credit risks. Borrowing costs in the country have been rising as economic growth slows, and the government cracks down on illegal capital inflows and attempts to rein in shadow banking.
“The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems,” Goldman Sachs said in a report released Monday.