NEW YORK — A worldwide stock sell-off sent Wall Street on a roller-coaster ride Monday, serving notice that investors are likely to endure a volatile year as economic growth slows globally and interest rates at home begin to rise.
China helped trigger the day’s turbulence after reporting yet another slowdown in its manufacturing sector on Monday, but investors are also growing concerned that increasing tension between Saudi Arabia and Iran could lead to higher oil prices and that the U.S. economy may not be strong enough to withstand such global upheaval.
“Fear woke up this morning, and hope is sleeping in,” said David Kelly, chief global strategist for J.P. Morgan Funds.
The sell-off quickly spread throughout Asia, Europe and then landed in U.S. markets with a thud. China’s CSI 300 index, a benchmark of the largest 300 stocks listed in Shanghai and Shenzhen, tumbled nearly 7 percent, while Japan’s Nikkei and the Euro Stoxx were both down more than 3 percent.
U.S. investors faced the worst start to a trading year in years, but recovered some ground during the final minutes of the session. The Dow Jones industrial average, a closely watched benchmark of 30 blue-chip stocks, was down more than 400 points, or 3 percent, for most of the day, before closing down 1.6 percent.
For mom-and-pop investors, the turmoil was an inauspicious start to a year that many market watchers are predicting will be rocky. Investors endured a lackluster 2015 with the major U.S. indexes closing the year either down or flat. And now, analysts said, as China’s economy continues to slow, they are likely to see a return of the stomach-churning volatility that sparked deep sell-offs last summer.
The U.S. markets survived those gyrations, and indeed they showed strength Monday relative to other parts of the world. But the sudden dip gave pause to those counting on a resurgent stock market to bolster their 401(k)s and offset stagnant wage growth. If those Main Street investors begin to feel less wealthy, or become nervous about their financial futures and curb their spending, the results could trickle down to already weak corporate balance sheets.
The market’s fickleness is already hindering start-ups itching to go public. The number of companies pursuing IPOs fell by more than 50 percent last year and new offerings will likely continue to slump until the stock market shows some resilience, analysts have said.
On Monday, the tumble on Wall Street hit some of the highest flying tech stocks the hardest. Amazon’s stock, which was up more than 100 percent last year, fell nearly 6 percent. (Chief executive Jeffrey P. Bezos owns The Washington Post.) Netflix shares fell 3.86 percent. Apple, which is depending on China to help fuel its growth, took a deep dive Monday morning before closing flat.
“It is a bucket of cold water as we come into the new year,” said Jack Ablin, chief investment officer for BMO Private Bank. The fate of the trading year “depends on the global economy, and so starting off on the wrong foot here is obviously disappointing.”
The market’s erratic trajectory comes as the Federal Reserve has begun to remove its support of the U.S. economy, allowing interest rates to rise for the first time in years. The Fed’s actions represented a bet that the U.S. economy was ready to stand on its own, but those assumptions could be called into question, analysts said. Last week, RBC Capital Markets lowered its projections for the performance of the Standard & Poors index this year. On Monday, new data for December showed that the manufacturing sector in the U.S. contracted at the fastest pace in six years.
“You have to get worried about the adequacy of economic activity going forward,” said John Lonski, chief capital markets economist for Moody’s Analytics. “Is the economy going to be lively enough?”
A stumble Monday on Wall Street doesn’t necessarily spell doom for 2016, but if the volatility continues throughout the rest of the month, investors are likely to find themselves disappointed, analysts said.
” ‘As January goes, so goes the year’ is an old Wall Street saying, which has been correct 72.4% of the time,” Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, said in a research note this morning.
The global selling frenzy underscores investors’ fears about China’s slowing economy. The world’s second-largest economy has cooled off, and last summer Beijing surprised many by allowing a devaluation of its currency. On Monday, it reported that its manufacturing sector continues to shrink.
The disappointing report cast renewed doubt on the effectiveness of Beijing’s policies to boost the country’s economy. Exacerbating investors’ anxiety in China was the implementation of “circuit breakers” that briefly prevented investors from selling their stock.
China is in the midst of a transformation from a manufacturing-driven economy to one fueled by consumers, but that process will take time – and be bumpy, analysts said. “That is the wild card,” said Michael Mullaney, chief investment officer at Fiduciary Trust Company, a wealth-management firm. “How smooth can that transition be?”
An escalation in Middle East tensions is also rattling some investors. Saudi Arabia, the world’s largest oil exporter, cut diplomatic ties with Iran on Sunday. On Monday, Saudi allies, Bahrain and Sudan, also cut ties with Iran in what analysts have described as one of the worst crises in decades between the region’s Sunni and Shiite powers.
“The worry is that this thing gets out of control,” said Nariman Behravesh, chief economist at IHS. “I think calmer heads will prevail, but it is a risky situation.”
Oil prices, which have lumbered near record lows for more than a year, rose nearly 3 percent Monday before closing flat on concerns that the conflict could disrupt oil supplies.
“It just reminds us that while economic conditions here at home appear to be stable and improving incrementally, we’re still part of a global economic system that is tied very closely together,” said Ablin from BMO Private Bank.
Investors are also watching to see how quickly the Federal Reserve moves to raise short-term interest rates again, after the initial increase in December. Signs that the slowdown in China may be worse than expected could indicate that the Fed moved too quickly to begin raising rates, economists say. “The world economy matters to the United States,” said Lonski of Moody’s Analytics. “It matters more today than it perhaps did in the past.”
Despite the erratic start to the trading year, investors should remain optimistic, said Phil Orlando, chief equity market strategist for Federated Investors. “Folks need to take a deep breath and relax a little bit and [don’t] get freaked out,” Orlando said. “This too will pass.”