Aug. 25--Is it over?
Probably not. Typically, when the market suffers the extreme convulsions that happened Monday, there are usually more days ahead that will torment investors.
On Monday, the Dow Jones industrial average crashed almost 1,100 points right after trading began in the morning, then recovered to an almost-painless-by-comparison 150 points down, and then near the end of the trading day the nervousness kicked in once again. The Dow turned down 588 points to 15,871, a decline of 3.57 percent. The Standard Poor's lost 3.94 percent and the Nasdaq dropped 3.8 percent.
There was virtually no place to hide in the stock market. In Illinois, only two of the state's 90 largest stocks were able to eke out a gain for the day: Health care company Hospira and Treehouse Foods. Pfizer is in the process of acquiring Hospira, and Treehouse Foods has said it is interested in mergers.
All sectors sold off as there was widespread nervousness in the U.S. and markets throughout the world. The Dow is down almost 11 percent for 2015, which is technically a correction. The German Dax and emerging markets are both in bear markets, with declines of more than 20 percent.
When managers of mutual funds and hedge funds see signs of a continued sell-off, they assume they will need cash on hand to pay nervous investors who want to yank money and run for the exits. So the managers build cash by selling solid stocks that are easy to sell.
"We are not buying," said Doug Ramsey, chief investment officer of the Leuthold Group, which is known for its historical research on the stock market. He expects the stock market decline to be 15 to 20 percent, and possibly 25 percent overall.
Prior to the sell-off that began last week, Leuthold reduced its exposure to stocks substantially, to 38 percent. When the firm is extremely nervous about the markets, it takes its exposure as low as 30 percent, when confident it goes as high as 70 percent.
Investors have many reasons to be on edge, but the historic selling early Monday morning came as China's stock market plunged the worst in years. With a loss of 8.5 percent in the Shanghai, government officials didn't provide the type of emergency maneuver many analysts were expecting over the weekend to calm the markets. Some analysts are concluding that Chinese authorities don't have the control Wall Street assumed they had to manage the stock market and the economy. And with China's economy slowing, oil and emerging markets have been plunging -- leaving uncertainty about whether the U.S. will be infected by financial contagion and global deflation.
The U.S. stock market climbed midday Monday as investors assumed the Federal Reserve would show up with its magic potion for nervous investors -- promising to continue low interest rates.
While a lot of chatter by Fed officials over the next few days could put investors in better spirits if the Fed seems willing to delay interest rate increases, analysts still think the stock market has punishing days ahead.
"Stock markets around the globe are in the midst of an unsettling -- and in some cases historic -- sell-off, said BlackRock strategist Russ Koesterich.
On Monday "investors generally played to the script" seen in most sell-offs, he said. Defensive sectors such as consumer staples and telecommunications held up best, while fast-moving momentum stocks such as biotechnology and cyclical stocks like semiconductors were hit the hardest.
Commodities continued to tumble, and oil traded below $40 a barrel. It was the first time since the financial crisis in 2009 when oil plunged that low. In Illinois the worst performing stock was Century Aluminum, which lost 11 percent Monday and is down 81 percent for the year.
Investors are still coming to grips with the reality that the world remains a fragile place, with growth much weaker than expected and with central banks such as the Federal Reserve seemingly unable to do enough to spark economies.
"There are several culprits" for the market's gyrations, said Koesterich: "Evidence of further deceleration in China's economy, the recent devaluation of the (Chinese) yuan, general concerns over global growth and collapsing inflations expectations, and the lingering potential for monetary tightening by the Federal Reserve."
Beyond such concerns, however, he noted that stock prices have been "broadly inflated," and need to fall to levels that are appropriate when the Federal Reserve and other central banks pull back on the stimulus that sparked such huge upturns.
Yet, despite stocks still being pricey, he said, "valuations are a long way from the tops typically seen prior to bear markets."
gmarksjarvis@tribpub.com
