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Stocks tank globally as slowdown in China keeps investors fearful

But indicators suggest that the U.S. economy remains resilient

- By Peter Eavis NEW YORK TIMES

Stock prices around the world continued to plunge Friday, threatenin­g to end one of the longest bull runs in the history of the U.S. stock market.

A searing six-year rally in U.S. stocks had advanced into the summer months, shrugging off challenges like the dispute over Greece’s debt. But in the past two weeks, world markets tumbled as investors grew increasing­ly concerned about economic conditions in China, which unexpected­ly devalued its currency last week, and the outlook for the economies of other large developing countries.

As the selling accelerate­d Friday afternoon, some benchmark indexes were at or near 10 percent below their recent peaks — a “correction” in Wall Street parlance.

“This is likely going to go down as the first meaningful correction in four years,” said David Rosenberg, an economist and strategist at Gluskin Sheff.

Sell-offs in the financial markets need not cause harm in the real economy. In many cases in the postwar period, the U.S. stock market has recovered after reacting negatively to problems overseas. Strong employment numbers and other economic indicators suggest that the U.S. economy remains resilient.

Still, fear in financial markets can feed on itself. And the declines in the markets are coming not only as China struggles, but also as the Federal Reserve is winding down its huge stimulus efforts. Trillions of dollars of cheap money from the Fed has fueled economic growth and helped push markets higher around the world. Now, the question is whether the world can stay on the recovery path without the Fed’s largess.

Such concerns Friday helped push stocks far below the peaks they reached just weeks ago when investors were ebullient. The Dow Jones industrial

average is more than 10 percent below the high it reached in May. At Friday’s close, the index was down 530.94 points, to 16,459.75, a loss of 3.1 percent on the day.

The Standard & Poor’s 500 index, a broader benchmark, fell below the psychologi­cally important 2,000 mark. It was down 3.2 percent on the day and more than 7 percent below its recent peak. It fell 64.84 points, to 1,970.89. The index lost $1.14 trillion in value this week, according to S&P Dow Jones Indices.

The Nasdaq, which contains a lot of technology stocks, fell 3.5 percent Friday, a slide that takes the index nearly 10 percent below its latest high. It closed down 171.45 points, to 4,706.04.

The price of oil, as measured by the benchmark U.S. crude contract in New York, briefly fell below $40 a barrel. The decline in the price of oil and other commoditie­s may indicate there is less demand for such commoditie­s because economies are slowing. The fall in oil reduces energy bills for consumers and companies, but it also hammers the profitabil­ity of the many oil and gas companies that have invested heavily during the recent shale boom.

The Vix, known as Wall Street’s fear gauge, spiked higher than the level it reached in the fall, when global markets sold off on concerns about global growth.

Investors rushed into the relative safety of government bonds. The yield of the 10-year Treasury note fell to 2.05 percent Friday, from 2.07 percent Thursday.

In the coming days, investors will have to decide whether the selling is part of summer squall that will soon pass or the start of tougher times for the global economy that could weigh on stock markets for months.

“There is a relatively more ominous slowdown going on in emerging markets — and that’s what the trade is all about right now,” said Gina Martin Adams, an equity strategist at Wells Fargo Securities.

Officials at the Fed will also have to weigh the seriousnes­s of the turbulence in the markets as they decide whether to raise interest rates for the first time in nine years. Raising rates

as early as next month, as some investors have expected will happen, could further unnerve investors, dampen economic activity and speed the flow of dollars out of developing countries. As a result, the Fed may decide to wait until later in the year, or longer. The central bank may try to estimate the effect of a falling stock market on the wealth and spending habits of U.S. households. The latest rally, which began as the last bear market ended in 2009, has helped drive up households’ holdings of stocks and mutual funds by more than $10 trillion.

Much, of course, depends on the strength of the Chinese economy — and an economic release Friday could stoke further fears. Output in China’s manufactur­ing industry contracted in the first three weeks of August at the fastest pace since the depths of the 2008-09 financial crisis, according to a preliminar­y reading of the Caixin purchasing managers’ index.

Markets have grown volatile since China made a surprise move last week to devalue its currency, the renminbi, by the biggest amount since 1994. On Thursday, Vietnam devalued its currency, the dong.

Another headwind for U.S. stocks is that their valuations — or the yardsticks that investors use to determine whether a company is cheap or expensive — recently climbed to demandingl­y high levels. This can make stocks all the more vulnerable to declines when bad news occurs or investor fearfulnes­s grows.

 ?? Spencer Platt / Getty Images ?? Traders work Friday on the floor of the New York Stock Exchange. A rout in global stock markets started in Asia and spread to Europe and the U.S.
Spencer Platt / Getty Images Traders work Friday on the floor of the New York Stock Exchange. A rout in global stock markets started in Asia and spread to Europe and the U.S.
 ?? Spencer Platt / Getty Images ?? The Standard & Poor’s 500 index lost 5.8 percent for the week, its worst weekly slump since 2011.
Spencer Platt / Getty Images The Standard & Poor’s 500 index lost 5.8 percent for the week, its worst weekly slump since 2011.

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