A tote board TSX numbers in Toronto in this file photo.Frank Gunn/The Canadian Press
A global market selloff accelerated Friday, as weak Chinese manufacturing numbers piled onto bad economic news that is now deeply worrying investors.
North American stock markets took yet another deep plunge, with the Dow Jones industrial average free-falling more than 530 points, and the S&P 500 dipping below 2,000 for the first time since February. The S&P/TSX composite index showed its fifth straight session of losses, sinking 5.6 per cent for the week and nearly 13 per cent since April.
The catalyst Friday was a private survey of Chinese manufacturing that showed it shrinking at its fastest pace in six years. This follows last week's devaluation of the Chinese yuan, and the recent plunge in China's stock market. All this has stoked concerns that the world's second-largest economy, a key driver of global growth, is slowing down significantly.
At the same time, other emerging market currencies are weakening or being devalued, as capital flees their economies.
Oil prices also dropped again Friday, with West Texas intermediate crude falling more than $1 (U.S.) to close at just over $40. That's bad news for Canada's economy, which is heavily tied to energy production. Other commodities have also fallen sharply, and the Bloomberg commodity index is at its lowest level since 2002.
At the heart of the market turmoil is an unsettling shift in investor psychology. For years, investors took heart that signs of slower growth would lead to stimulus moves by central banks and governments, and stocks marched ever higher. But with such moves largely exhausted, bad news is now just bad news.
"This is a test of the old regime. It is the first time where we have seen growth fears trump the prospect of more liquidity," said Nick Lawson, managing director at Deutsche Bank in London. "The multiples we are being asked to pay for equities are increasingly out of step with the growth outlook."
A key concern is whether this North American market downturn is a temporary blip during volatile summer trading, or the sign of a longer-term decline – and economic weakness – that could go deeper and last much longer.
Douglas Porter, chief economist at Bank of Montreal, thinks the bad market conditions will likely be temporary. "I think of it as more of an air pocket rather than stepping off a cliff."
Stocks have been "richly valued" in the past few months, and thus vulnerable to bad economic news, such as that emanating from China, he said. "For investors it is adding up, and raising serious doubts over not just China's growth rate, but emerging markets in general."
But August is traditionally a very volatile month, he added, with relatively low volumes accentuating stock market moves that might otherwise be a bit less dramatic.
Meanwhile, the United States has generated strong economic numbers and there is no reason to think the domestic economy there will falter, Mr. Porter said, despite some concerns about companies that sell to China – particularly in the technology sector. "I don't see any cause for concern yet."
He added that the last big emerging market crisis that happened in 1997 and 1998 "barely made a ripple in the U.S. economy." While the United States is now more tied to those emerging markets, "the U.S. can go it alone if need be."
Quincy Krosby, a market strategist at Prudential Financial in Newark, N.J., noted that the U.S. stock market, despite the recent setbacks, is not far off its record highs. "Over all, this isn't much of a pullback," she said.
Still, many individual U.S. stocks fell sharply on Friday. Stock of tractor company Deere & Co. dropped 8 per cent after it reported a quarterly profit that was down 40 per cent, and Apple Inc. – which sells heavily to China – fell almost 6 per cent.
The markets have been "dicey," Ms. Krosby said, ever since the U.S. Federal Reserve Board hinted it will likely begin raising interest rates later this year. "That has been lurking for a number of months."
At the same time, there have been continuing worries over China, the strength of domestic demand, oil prices, and a strong U.S. dollar, which dented the earnings of some large U.S. multinationals and exporters. These have been offset by relatively strong job creation, and a healthy housing market. The overall economy, Ms. Krosby said, is "not going gangbusters" but is holding up well.
The key question now, she said, is whether the Fed will follow through on raising rates, given the current market conditions. "There is confusion over what they want to do and when do they want to do it."
Millan Mulraine, deputy head of U.S. research and strategy at TD Securities, said he too sees the recent market plunge as a "temporary hiccup." Economic fundamentals are the key, and in the United States, they are "quite strong and favourable," he said. "That's not to say that the concern about global economic momentum isn't valid. It is valid, particularly as it relates to China. But outside of China, the worst of the weakness is behind us." The euro zone and other major economies are moving in the right direction, he said.
With files from Reuters