Renewed fears of an economic slowdown in Europe and Asia have injected a note of fear into what had been some complacent markets, leading to a sharp sell-off in stocks on Thursday.
One day after a Wednesday rally, stocks in the US slumped 2 percent.
Investors around the world have been selling riskier assets, like stocks and oil, and seeking out safe havens, like US Treasury bonds and gold, leading to levels of volatility that have not been seen since early this year. This summer, the Standard & Poor’s 500 index went two months without a daily move of 1 percent or more, while in the past two weeks there have been six such moves.
The gloom has been building in recent days as economic data pointed to sluggish growth, or even contraction, in big economies like Germany and Japan. Global leaders gathered in Washington on Thursday suggested that all of the efforts to stimulate growth in the EU and Asia during the past few years have yielded disappointing results.
“In the face of what we have called the risk of a new mediocre, where growth is low and uneven, we certainly believe that there has to be a new momentum,” IMF managing director Christine Lagarde said at a news conference on Thursday.
The US has been one of the few bright spots in the global economy. A new report on unemployment claims released on Thursday bolstered recent hope that the job market is continuing to improve, albeit unevenly.
Yet troubles in the rest of the world could lead to a rocky road ahead for US exporters, and particularly for the energy industry, which has been one of the biggest engines of growth for the world’s largest economy.
The energy sector was hit the hardest in Thursday’s stock sell-off as the price of crude oil fell 1.5 percent.
“What’s changed is that investors seem to be suddenly putting more weight on what’s going on in the rest of the world and it isn’t pretty,” said Ed Yardeni, the founder of an economic consulting firm.
The Dow Jones industrial average dropped 334.97 points, or 1.97 percent, to 16,659.25 on Thursday, while the broader S&P 500 fell 40.68 points, or 2.07 percent, to 1,928.21 — its lowest level since early August — and the NASDAQ composite index fell 90.26 points, or 2.02 percent, to 4,378.34.
The damage, though, has been much worse in the rest of the world and particularly in Europe.
During the past few years, European stocks have been some of the most popular investments as traders bet on an economic recovery from the financial crisis on the continent. Yet most of the gains made in those markets this year have been lost in recent weeks. The leading German stock index is now down to its lowest level since late last year.
Germany had been a rare source of strength in the region. However, recent economic data have suggested that Europe’s largest economy could be stalling. For instance, exports from the country dropped the most in five years in August, according to figures released on Thursday.
Earlier this week, the IMF trimmed its projections for economic growth in the eurozone to 1.3 percent for the year, 0.3 percentage points lower than its last projection.
It has become standard in the past few years for central banks to respond to signs of economic turbulence with new stimulus programs. Yet now, the broader fear is that central bankers may have reached the limits of their ability to significantly help the economic situation given that interest rates already are at record lows.
European Central Bank President Mario Draghi said in a speech on Thursday at the Brookings Institution that his bank would continue to take steps to support the economy, but he warned European politicians that they were going to have to do more if they wanted to see a meaningful recovery.
“I am uncertain there will be very good times ahead if we do not reform now,” Draghi said.
In Japan, another place where central bankers have made vigorous endeavors to revive the economy, the disappointing results so far were evident in the IMF projections released this week, which trimmed expectations for growth in Japan by 0.7 of a percentage point, to a meager 0.9 percent.
The US Federal Reserve appears to be waiting to draw back its energetic stimulus programs, according to notes released on Wednesday from the central bank’s most recent meeting. Those notes initially led stocks up, as investors bet that the central bank would provide support for the economy for longer than expected.
Yet on Thursday, many strategists were focusing instead on concern in the Fed minutes about the potential for slowing growth in Europe and China to hurt US companies.
The assumption that central bankers will be forced to buy more bonds to inject more money into the economy has helped the bond markets, already the beneficiary of a flight to safety.
The yield on the Treasury’s 10-year note is now down to its lowest levels since last year. On Thursday, it edged up to 2.33 percent, from the year’s low of 2.32 percent late on Wednesday, while its price dipped 2/32 to 100 14/32.
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