Don’t Panic, but Wall Street Correction May Continue
Stocks opened higher Wednesday on Wall Street, but the recent market rout may continue if shares repeat this weekâ€™s pattern of recovery and decline.Indexes on Wall Street each opened more than 2 percent higher compared with their previous closing prices, but those gains had already faded by 12:30 p.m. in New York City. The Nasdaq composite and the Standard & Poorâ€™s 500 were both up 0.8 percent compared with Tuesday, while the Dow Jones industrial average had increased 1.15 percent from its previous closing price.
Wall Street and markets around the world this week declined in response to a massive sell-off in Chinaâ€™s Shanghai Composite Index, which accentuated anxiety about whether the Federal Reserve should raise interest rates this fall. The S&P 500 is in the midst of its first six-day losing streak since 2012.The Shanghai index closed down 1.5 percent on Wednesday, after falling 7 percent on Tuesday and declining 8.5 percent on Monday.
Wall Street recovered on Tuesday morning and nearly regained its losses before shares declined even lower. This is in part because traders expected a much worse decline for China than what occurred on Wednesday, says John Blank, chief equity strategist for Zacks Investment Research.
Chinaâ€™s market trouble has dimmed optimism about emerging markets, accentuating doubts in traders already wary about global growth. Russia and Brazil were in bear markets because the price of oil has fallen below $40 per barrel, and the European Union is sorting out debt crises, Blank says.
If the S&P 500 sinks again on Wednesday, it will be the indexâ€™s worst rout since 2011. Wall Streetâ€™s decline could last â€œthree to six monthsâ€ and may not end until oil prices find a bottom, Blank says.â€œWall Street may be back in mid-2011 mode,â€ he says. â€œThat was the last time we saw a swift U.S. sell-off on the European fear precipitated by the first Greek crisis. That stock market fear took six months to resolve itself and find a bottom. Markets donâ€™t find a bottom as much as they exhaust the sellers over time.â€
Analysts had determined Wall Street was ripe for a decline since last year, as share values rose to record highs in the sixth year of the bull market.
The market between May and October has been vulnerable for corrections since 2012, with the S&P 500 sinking as low as 10 percent during those months before a permanent recovery began, Barry Bannister, chief equity strategist for Stifel Financial Corp., said in an analyst note on Aug. 20. Bannister said stocks had slowed because global growth had not given Wall Street the boost it needed before the Federal Reserveâ€™s anticipated interest rate hike. Many had expected the Fed to boost rates in September, though the recent market activity has led some to think officials will postpone an increase until December or later.
William Dudley â€“ president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee â€“ said in a Wednesday press briefing there is now a “less compelling” argument to boost interest rates in September in part because of global stock market declines. But he also noted that “short-term stock market volatilityâ€ doesn’t really have a long-term impact on the U.S. economy.
The Fed is looking at the broad economic outlook in its decision on whether to raise rates, Dudley said, adding that â€œinternational developments and financial market developments do have relevance.â€
Traders wonâ€™t be able to predict the end of this downturn by looking to historical examples, however, because while declines follow patterns, the ending always comes about differently, says James Paulsen, chief investment strategist at Wells Capital Management.
â€œIf there was true panic people would be buying gold and the dollar and the long-term bonds,â€ Paulsen says. â€œWhen this hits bottom, people will be a lot more scared than they are right now.â€