US stocks have suffered their worst week in recent memory after a poor report on the Chinese economy sparked broader anxiety about emerging economies and whether equities are overvalued.
The deepest decline came in the Dow Jones Industrial Average, which fell 579.45 points (3.52 per cent) to 15,879.11 in the biggest weekly loss in per cent terms since November 2011.
The broad-based S&P 500 fell 48.41 (2.63 per cent) to 1,790.20, while the tech-rich Nasdaq Composite Index declined 69.41 (1.65 per cent) to 4,128.17.
This week’s bruising finale raised the issue of a stock market correction to the top of the agenda.
After the S&P 500 surged nearly 30 per cent in 2013, equity markets have largely meandered through the first part of the new year on loose confidence that the US economic recovery was on track.
But stocks plunged on Thursday after HSBC’s China manufacturing sector purchasing managers index fell to 49.6, below the 50 line between growth and contraction.
US Treasury prices also rose, while emerging-economy currencies plummeted.
Stocks continued to fall on Friday, suggesting broader investor discomfort.
“It may be that if anyone is looking for reasons to sell, they can always find reasons to sell,” Jack Ablin, chief investment officer at BMO Private Bank, said of Thursday’s China report.
Ablin said the market is probably overvalued, citing estimates that the stock market is overvalued by 10-20 per cent.
“There is a real reassessment going on on the street that things might have really gotten carried away last year,” said Mace Blicksilver, director of Marblehead Asset Management.
“The market is in a dangerous position because we have not really had a correction in a long time.”
Blicksilver characterised the recent round of corporate earnings as “okay,” but no better.
The results to date have seen a few standout winners, like online video service Netflix that posted a big increase in subscriptions and Microsoft, which notched record revenues thanks to strong demand for Xbox consoles and other products.
But Wall Street punished IBM after it posted its seventh straight quarter of declining revenues.
Even more typical was the reaction to Johnson & Johnson, which fell after giving a disappointing outlook even as it bested earnings expectations.
“I was hopeful that fundamentals would pick up,” Ablin said.
“But so far earnings season, while reasonable, hasn’t been a huge positive surprise.”
Tom Cahill, portfolio strategist at Ventura Wealth Management, said equity markets are jittery in light of the steep declines in recent days in the Argentine peso and other emerging-market currencies.
“The situation that is emerging right now with the currencies in South America and other emerging markets is significant enough that it could lead to further downside in the near-term in the equities,” Cahill said.
The drop in emerging market currencies has fuelled additional speculation on whether next week’s policy meeting of the US Federal Reserve will result in a decision to continue to scale back stimulus, analysts said.
Cahill said this week’s volatility could persuade Fed officials of the need to “move ahead very carefully” with the taper.
But other analysts expect the US central bank to stay the course and proceed with further reducing bond purchases.
Investors will also wade through a busy week of economic data, which include the Case-Shiller index of home prices, the Conference Board’s report on consumer confidence and the first estimate of fourth-quarter gross domestic product.
The calendar of corporate earnings include reports from giants like Apple, Pfizer, Boeing, Caterpillar, ExxonMobil, Facebook and Google.
Traders could see individual stocks lifted or depressed by an ongoing wave of shareholder activism that shows no sign of abating.
Last week, Third Point disclosed a campaign to shake up Dow Chemical, while longtime corporate raider Carl Icahn pressed ahead with campaigns to win a large share buyback from Apple and the spinoff of eBay’s PayPal unit.