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Stock Market Rebound Falls Apart as Indexes Reverse Early Gains Stock Market Rebound Falls Apart as Indexes Reverse Early Gains
(about 2 hours later)
■ American markets lost big gains made earlier in the day and finished Tuesday in the red. A sudden reversal in United States stock prices late in trading on Tuesday produced a sixth consecutive session of losses and heightened uncertainty about the challenges facing global markets.
■ In China, the benchmark Shanghai composite index closed 7.6 percent lower. Chinese officials later cut interest rates and eased banks’ reserve requirements. The wild swings in prices over the last two days have been the most extreme since the financial crisis. The benchmark Standard & Poor’s 500-stock index surged as much as 2.9 percent on Tuesday, but ended down 1.4 percent.
■ Most other markets in Asia stabilized or rallied modestly. An exception was Japan, where stocks closed down 4 percent. The resurgence of volatility has overturned a sense of comfort among many investors who had grown accustomed to calm markets and steadily rising stock prices in recent years.
■ European equities rebounded, recovering most of Monday’s losses. The Euro Stoxx 50 closed up 4.7 percent. In London, the FTSE 100 ended the day 3.1 percent higher. While the market turmoil may not yet be flashing warning signs about the United States economy, which still appears to be strengthening, it is pushing investors to take a closer look at their portfolios. Stock prices have generally been rising faster than the profits of corporate America, and that is prompting caution. Even after the recent downturn, investors are still paying more for corporate profits than they have on average over the last 10 years.
■ The international and American oil benchmarks bounced back, despite concerns about oversupply. “The last two days have been a wake-up call for a lot of portfolio managers,” said Nicholas Colas, the chief market strategist at Convergex, an institutional brokerage firm. “It forces everyone to reconsider their base assumption for things like earnings growth and revenue growth.”
A strong rally in the stock market faded rapidly on Tuesday afternoon, killing hopes for an end to the recent turmoil in the markets. Some investors have taken an even darker outlook, questioning whether the markets — and the broader economy — will be able to abide a coming rise in interest rates that the Federal Reserve has been moving toward for months.
The Standard & Poor’s 500-stock index ended the day down 1.4 percent, to 1,867.62, after earlier rising almost 3 percent from Monday’s close. The Dow Jones industrial average finished 1.3 percent lower, off 205 points, at 15,666.44. For the time being, there are few doubts that the American economy has been growing, and the economy is unlikely to be significantly hampered by recent turmoil in China. New data reported on Tuesday morning pointed to a healthy increase in consumer confidence in August and a rise in new home sales in July.
It was a huge reversal for the markets, as the Dow was up as much as 441 points in the morning. Tech stocks also fell after climbing earlier in the day, with the Nasdaq finishing 0.4 percent lower, to 4,506.49. But voices like Lawrence H. Summers, the former chief economic adviser to President Obama, have recently joined a chorus of skeptics arguing that the growth may not be able to continue if the Fed steps back from the market, as it had looked set to do in September. Investors have ramped up bets this week that the Fed will have to delay any planned changes in interest rates.
Despite the turmoil, investors were reminded of the continuing strength of the American economy by new data out on Tuesday morning showing that consumer confidence rose in August and that new-home sales rose in July. That helped support a market rally for much of the day. Tuesday provided another reminder of the wide range of outcomes that investors are debating.
And certain segments of the market fared better. Oil prices recovered, with futures on the New York Mercantile Exchange rising 3 percent to settle at $39.31 a barrel. Early on Tuesday, investors in markets around the world appeared to take comfort as China, the epicenter of the recent sell-off in global stock markets, took steps to tackle slowing growth in the world’s second-largest economy. The Chinese central bank announced measures intended to lower borrowing costs and stimulate the economy.
Investors in search of safe havens also did not drive up the prices of Treasury securities on Tuesday. The yield on the benchmark 10-year Treasury note rose to 2.08 percent, after briefly falling as low as 1.90 percent during the worst of Monday’s rout. European markets rose sharply, and when New York trading opened, stocks surged. The Dow Jones industrial average, which had plunged 1,000 points early on Monday, rose 441 points early on Tuesday in another day of heavy trading.
But the quick reversal in American stock indexes late in the session on Tuesday brought into question whether the recovery that seemed to be building earlier in the day would have any staying power. That optimism, however, slowly faded. And in the last half-hour of trading, the tentative rally fell apart completely. The Dow closed down 204.91 points, or 1.3 percent, at 15,666.44. The S.&P. 500 ended 25.60 points lower at 1867.61, while the Nasdaq composite index closed down 0.4 percent, or 19.76 points, to 4,506.49.
“Clearly this is an unstable market,” said Tim Ghriskey, the chief investment officer at Solaris Group. “There’s a lot of volatility here, so there is going to be instability.” There were no obvious explanations for the sudden decline in prices in the waning minutes of trading, though many investors said it suggested the lack of conviction behind recent market moves.
During the optimistic morning of trading in the United States, European stock markets posted strong gains, making up most of the losses suffered Monday. “It is going to take a week, or a couple of weeks, to have this market stabilize,” said Timothy M. Ghriskey, the chief investment officer at the Solaris Group.
The markets in China, however, posted deep losses again on Tuesday, with Shanghai stocks down 7.6 percent on the heels of Monday’s 8.5 percent plunge. But after the markets closed in China, Beijing officials took strong measures to stabilize financial markets by cutting interest rates and reducing the amount of money banks are required to keep on hand to guard against risk. The major stock indexes have all entered into what is known as a correction — a 10 percent decline from the recent high, reached in May. The new declines brought the indexes closer to a so-called bear market, which is a 20 percent slump from recent highs. The Dow is now down 15.5 percent since May. The pullback has erased all of the gains that American stocks had made since early 2014.
Elsewhere in Asia, the free fall of the last few days appeared to have ended, with the Hang Seng in Hong Kong up modestly, and emerging markets like India faring better. Treasury prices, which have benefited from the instability in stock markets, were weaker on Tuesday. The price of the benchmark 10-year note fell, driving its yield — which moves in the opposite direction of its price — to 2.08 percent from 2.01 percent on Monday.
Markets around the world have been jolted in recent days by concerns about China’s ability to continue as a powerful engine of global economic growth. That has added to worries about the potential impact of higher interest rates in the United States, if the Federal Reserve sticks with its stated intention to raise its benchmark rate soon. The big moves this week have struck many strategists as an overreaction, particularly given that there are no new major signs of any turn in the economy.
By the time Monday’s seesaw ride ended, the benchmark S.&P. 500 was off 11 percent from its May high, called a correction in market parlance, its first since 2011. But many investors who focus on the value of stocks, as measured by the price paid for each dollar of profit from a company, say that stocks have further to fall still if valuations are to come in line with historical norms.
The recent market turmoil has led many investors to turn their focus to the government officials who have become the most important players in the market since the financial crisis. Investors were paying $16.80 for every dollar of earnings over the last year — the so-called price-to-earnings ratio — even after Monday’s losses, according to FactSet Research. Over the last 10 years, the ratio has been, on average, $15.70.
The biggest questions involve the health of China’s economy and the capacity of the country’s leaders to manage its slowdown. On Tuesday, China’s premier, Li Keqiang, said that despite the market turbulence, the economy remained sound. “When we are this high, even with this pullback, the track record of future returns isn’t all that good,” Mr. Colas of Convergex said.
But after the further fall in Chinese stock markets, China’s central bank late on Tuesday announced cuts to interest rates, as well as to reserve rate requirements for banks. It was the fifth rate cut since November. Over the last two years investors have bid up the price of stocks in the hope that the companies would experience significant future growth. In recent quarters, though, American corporate profits have been falling on a year-to-year basis. Looking forward, many investors are anticipating slower growth from American companies unless the economy significantly picks up.
The move brought interest rates down 0.25 percentage point, lowering the one-year lending rate to 4.6 percent, and reduced the reserve rate requirement 0.5 percentage point. Still, all of the negative sentiment could dissolve on Wednesday morning, as it appeared to do for a time on Tuesday morning.
The central bank, called the People’s Bank of China, said the cuts would “further lower the costs of capital for businesses.” When American stocks opened on Tuesday, European markets were up sharply, recouping most of the losses they had experienced on Monday. The benchmark German index ended the day up almost 5 percent, while France’s benchmark index was up 4.1 percent — all before the markets in the United States began to experience trouble.
“Currently, there are persisting downward pressures on the country’s economic growth,” the bank said in an explanation that accompanied the announcement. “There has also been quite large volatility in global capital markets recently, and monetary policy tools need to be applied more flexibly.” Earlier in the day, the markets in China posted deep losses, with Shanghai stocks down 7.6 percent following Monday’s 8.5 percent plunge. But after the markets closed in China, Beijing officials cut interest rates and reduced the amount of money banks are required to keep on hand to guard against risk.
The central bank also removed the upper limit on interest rates for fixed-term deposits of more than one year. With inflation in China generally low, the central bank said the time was ripe for such steps. The moves suggested that Chinese authorities are now looking to stabilize the economy, rather than focusing on the problems in the financial markets. But similar past efforts have failed to reverse the country’s problems, and many investors are skeptical that the latest measures will be more effective.
Analysts said the moves appear to be focused more on stabilizing the Chinese economy than on the struggling stock market. In the United States and Europe, too, there are growing fears that the central bankers have done everything in their power and now need to rely on some outside assistance.
“The change of tack may signal that policy makers have finally conceded that their efforts to determine prices are futile,” Mark Williams, the chief Asia economist at Capital Economics, wrote in a note to clients. “Instead, the focus now is on supporting the economy.” Mohamed A. El-Erian, chief economic adviser at Allianz, wrote on Facebook that Tuesday’s reversal will “erode the faith that market participants have in the power of central banks to repress volatility.”
Beyond China, there is a growing debate among market participants about whether the Federal Reserve will still follow through with plans to push interest rates higher, an action that was expected to begin in September. The market turmoil has led some, including Lawrence H. Summers, a former chief economic adviser to President Obama, to call for the central bank to reconsider those plans.
The debates in both China and the United States have often turned to more worrying questions about whether the levers that central bankers use to influence the markets are losing their power after years of extensive intervention.
“They’ve pretty much pulled out all the stops already,” said Mr. Ablin of Harris Private Bank. “Now they are just waiting patiently for them to take a fuller effect in the economy.”
With all the hand-wringing, however, many investment advisers have been urging clients to ignore the recent swings.
Although a number of American companies stand to be hurt by any weakness in China, data out Tuesday was the latest to suggest that the economy in the United States is continuing to gain strength.