Stocks extend slide as China heightens anxiety

The Federal Reserve's message it may reduce its aggressive stimulus program later this year and a slowdown in Chinese manufacturing and reports of a credit squeeze in the world's second-biggest economy heightened worries on Wall Street as six weeks worth the gains were wiped out.
By STEVE ROTHWELL Published: June 21, 2013
Advertisement
;

— For investors, there was no place to go Thursday.

A day after the Federal Reserve roiled Wall Street when it said it could reduce its aggressive economic stimulus program later this year, financial markets around the world plunged. A slowdown in Chinese manufacturing and reports of a credit squeeze in the world's second-biggest economy heightened worries.

The global sell-off began in Asia and quickly spread to Europe and then the U.S., where the Dow Jones industrial average fell 353 points, wiping out six weeks of gains.

But the damage wasn't just in stocks. Bond prices fell, and the yield on the benchmark 10-year Treasury note rose to 2.42 percent, its highest level since August 2011, although still low by historical standards. Oil and gold also slid.

Fears of high interest

“People are worried about higher interest rates,” said Robert Pavlik, chief market strategist at Banyan Partners. “Higher rates have the ability to cut across all sectors of the economy.”

The question now is whether the markets' moves Thursday were an overreaction or a sign of more volatility to come. What is becoming clearer is that traders and investors are looking for a new equilibrium after a period of ultralow rates, due to the Fed's bond-buying, which helped spawn one of the great bull markets of all time.

It doesn't mean the stock run-up is over. After all, the S&P 500 is still up 11.4 percent for the year and 135 percent since a recession low in March 2009. But it may suggest the start of a new phase in which the fortunes of the stock market are tied more closely to the fundamentals of the economy.

And that might not be a bad thing. The reason the Fed is pulling back on the bond-buying is because its forecast for the economy is getting brighter. The job market is improving, corporations are making record profits and the housing market is recovering.

“People are overreacting a little bit,” said Gene Goldman, head of research at Cetera Financial Group. “It goes back to the fundamentals, the economy is improving.”