“What you had was a knee-jerk reaction down,” Orlando said. “Then investors are sitting down and actually thinking about the negative catalysts this morning. In fact, we are absolutely expecting additional policy response out of the emerging markets, out of Europe, out of the United States.”
Orlando said he thinks the GDP report will likely be weak but that third-quarter numbers will get a lift from a strong back-to-school shopping period. If parents head to the stores in droves at the end of the summer, that may signal a strong holiday shopping season, which would lift GDP in the fourth quarter.
In the meantime, investors are confronting strong headwinds from abroad.
Borrowing costs soared for Spain and Italy on Monday, renewing investor fears that the limited bailout granted to Spain by European leaders will not be enough to hold off financial crisis for the troubled nation. The Spanish economy contracted by 0.4 percent in the second quarter, according to the Bank of Spain.
As interest rates soared on Spanish bonds Monday, a rush to sell shook European markets. Main indexes fell more than 7 percent in Greece and 3 percent in Spain and Germany. Spain’s market regulators temporarily banned short-selling of shares, which investors use to profit by betting that the price of a stock will fall.
Investors were also concerned that Chinese authorities had run out of fiscal and monetary stimulus options for the Asian nation after a Chinese central bank adviser forecast a slowdown in economic growth.
Orlando said China’s economy may have more steam than it’s given credit for. He anticipates growth will trough “somewhere in the middle of the year and then roll back up” as the Chinese government introduces monetary policy to stave off decline.
The tumult sent the major U.S. stock indexes on a downward spiral. The Dow Jones industrial average dropped 239 points. By about 2:16 p.m., however, the Dow was down 114 points, or about 1 percent; the Standard & Poor’s 500 index was down 13 points, also about 1 percent.
The initial drop marks the Dow’s fifth decline of 200 or more points this year.
Stocks had crept up in the first half of last week, as investors took comfort in strong earnings from such companies as Coca-Cola and Honeywell. The tides changed on Friday as a number of European companies reported weak quarterly results.
Bank stocks, which are especially sensitive to European performance, were among hardest-hit on Monday morning. Bank of America fell 1.6 percent, while Citigroup stock dropped 2 percent.
Meanwhile, energy stocks tumbled as the price of oil fell more than $3.50 per barrel, to below $90. Exxon Mobil slipped $1.33, or 1.5 percent, to $84.68, and Chevron dropped 2.1 percent to $106.86.
“We’re in the midst of a temporary soft patch that will get better in the second half of the year, but the market is pricing in a worse case scenario,” Orlando said.