Volatility returns to stock markets
Investors got another case of the jitters Tuesday, sending U.S. stocks back into correction territory.
The Dow Jones industrial average plummeted 469.68 points or 2.84 percent to close at 16,058.35. The collapse left the Dow down 12.3 percent from its May 19 high. The Standard & Poor’s 500 index and Nasdaq composite indexes lost just under 3 percent.
Traders attributed the opening sell-off to reports in China showing further declines in its factory sector and exports. Stocks in Asia sold off overnight. Japan’s Nikkei index fell nearly 4 percent and the Shanghai composite lost 1.3 percent. That sparked a wave of selling in Europe.
In the United States, economic reports were mixed. The Institute for Supply Management reported that its manufacturing purchasing manag-
ers index dropped to 51.1 in August from 52.7 in July. A reading above 50 suggests the economy is still expanding, but the August number was lower than expected and indicates that the strong dollar, falling energy prices and slowing growth in China are causing U.S. factories to expand at a slower rate.
On the bright side, the Commerce Department reported that seasonally adjusted construction spending rose 0.7 percent in July from June to its highest level since 2008.
Most likely, Tuesday’s sell-off was just a continuation of the volatility investors saw last week, which started when the Dow lost more than 1,000 in the opening minutes of trading Monday. Although it recovered some of those losses, the cause of the minicrash remains unknown and worrisome.
“Last week, I detected lots of concern among our institutional accounts that while bear markets are caused by recessions, a flash crash could cause a recession in the global economy that is already looking frail and fragile,” Wall Street economist Ed Yardeni said in a report Tuesday. He added that he does not share that concern at this time.
The main economic event this week is Friday’s August jobs report and its impact on the Federal Reserve’s decision whether to raise the short-term federal funds rate at its Open Market Committee meeting Sept. 16-17. “We wouldn’t rule out a melt-up (in stocks) after the next (committee) meeting. That could happen if the Fed does nothing. Or it might happen if the Fed hikes by (0.25 percentage point) and Fed Chair Janet Yellen downplays it at her press conference on September 17,” Yardeni wrote.
Charles Rotblut, a vice president with the American Association of Individual Investors, said it was not surprising to see volatility return to the markets after such a long absence.
For the six-month period that ended Aug. 13, the S&P 500 had been trading in the narrowest half-year trading range ever, by a wide margin, as noted in a tweet by Driehaus Capital. Over that period, the difference between the lowest and highest close for the S&P 500 was 4.4 percent. The next-narrowest trading range was 5.26 percent in mid-1993.
Leading up to the correction, individual investors had been saying — in surveys and in comments — that stocks were overvalued and in need of a correction, said Rotblut. They sure got one. For the six-month period ending Tuesday, the S&P 500 has fluctuated 14.1 percent.
Rotblut’s advice for investors: “I would be buying, but if somebody is really nervous, I would suggest tuning everything out and waiting another week to look at their portfolio. ... The big thing is to realize that over the long term, we are compensating for having an upset stomach in the short term.”