Fear is back in the market.
Investors are worried about slower economic growth in China, a gloomier outlook for U.S. corporate profits and an end to easy money policies in the United States and Europe.
They’re also fretting over country-specific troubles around the world — from economic mismanagement in Argentina to political instability in Turkey.
Those fears converged to start a two-day rout in global markets this week, capped by a 318-point drop in the Dow Jones industrial average Friday. It was the blue-chip index’s worst day since June. The Dow plunged almost 500 points over the two-day stretch.
The Dow finished down 2 percent at 15,879 Friday. The Standard & Poor’s 500 index fell 38 points, or 2.1 percent, to 1,790. The Nasdaq composite fell 90 points, or 2.2 percent, to 4,128.
Small-company stocks fell even more than the rest of the market.
Despite the sell-off, U.S. stocks remain near all-time highs after surging 30 percent last year. The S&P 500 is 3 percent below its record high of 1,848 on Jan. 15.
U.S. stocks have not endured a correction — a drop of 10 percent or more over time — since October 2011.
The turbulence coincides with a global economic shift: China and other emerging market economies appear to be running into trouble just as the developed economies of the United States and Europe finally show signs of renewed strength nearly five years after the end of the Great Recession.
The trouble began Thursday after a January survey showed a drop in Chinese manufacturing activity. Days earlier, China reported that its economic growth last year matched 2012 for the slowest pace since 1999.
“It is interesting how even a mild tremor in China’s growth causes such anxiety around the world,” said Eswar Prasad, professor of trade policy at Cornell University.
In Asia Friday, Japan’s Nikkei 225 slipped 1.9 percent to close at 15,391.56; Hong Kong’s Hang Seng shed 1.2 percent to 22,450.06; and Seoul’s Kospi dropped 0.4 percent to 1,940.56.
Slower growth in China is bad news for countries that supply oil, iron ore and other raw materials to the world’s second-biggest economy. Some of those countries, such as Indonesia and South Africa, were already struggling with an outflow of capital as rising U.S. interest rates drew investors to the United States.
Reliance on China
Since the recession, the global economy has relied heavily on China and other emerging markets as the developed economies of the United States, Europe and Japan struggled.
But China’s economy is decelerating. It grew 7.7 percent in October-December 2013 from a year earlier, down from the previous quarter’s 7.8 percent growth. Factory output, exports and investment all weakened. On Thursday, the preliminary version of HSBC’s purchasing managers’ index of Chinese manufacturing fell to 49.6, the lowest reading since July’s 47.7. Anything below 50 signals a contraction.
China’s growth is still far stronger than the United States, Japan or Europe, but is down from the double-digit rates of the previous decade.
Many economists are troubled less by the slower growth numbers than by China’s over-reliance on trade and investment instead of spending by its consumers.