U.S. stocks plunge again in one of worst starts to a year ever

U.S. stocks plunged again Friday in the worst start to a year ever.

Worries about China's slowdown infecting the global economy sent stock markets steeply lower Friday as U.S. equities got off to one of the worst starts to a year ever.

The Dow Jones industrial average at one point was down more than 500 points Friday, and closed down 391 points, or 2.4 percent. The Standard & Poor's 500 index closed down 2.16 percent and the Nasdaq composite index dropped 2.74 percent.

All three major indexes have fallen solidly into correction territory — defined as at least a 10 percent drop from recent highs — in the past few weeks.

The volatile sell-off sounds a dissonant note in a stream of otherwise good news about the U.S. economy. The nation added nearly 300,000 jobs last month, ending a year of solid economic growth that prompted the Federal Reserve to finally start increasing interest rates in December.

Such optimism seemingly would buoy investors, but the market has been swamped by fears about sliding oil prices and the global economy. While some said the stock market turmoil is just short-term jitters, it could set the tone for all of 2016.

"From a fundamental side, there's really not a whole lot that supports all this volatility," said Wayne Lin, a portfolio manager at QS Investors, an affiliate of Baltimore-based Legg Mason. "But on the sentiment side, we're reaching this unknown in terms of oil prices, and that causes equity investors to be nervous."

The price of crude oil dropped below $30 a barrel Friday, down from $100 a barrel in the summer of 2014. U.S. energy companies have suffered as the Middle East continues to flood the world with cheap oil, raising questions about their ability to repay their debt.

Chinese markets dropped further early Friday with the Shanghai Composite Index falling 3.6 percent amid news that Chinese officials said the country will report next week that its economy grew 7 percent in 2015, which would be the weakest growth in 25 years.

And recent earnings reports have been less exciting than anticipated, Lin said.

"When you get an environment like that, there's not a whole lot to support equity except earnings," he said. "Investors get skittish and start pulling in and out of risk. They flash back to 2008."

That has helped drive U.S. equities markets down over the past two weeks. Since the first opening bell of 2016 on Jan. 4, both the Dow and the broader S&P 500 are off about 8 percent.

The sell-off follows the worst year for U.S. equities since the 2008 financial crisis as the Dow slipped 2.2 percent and the S&P 500 rose 1.4 percent in 2015.

While the global economy might be behind the drop in U.S. stocks, the downturn could start hurting the domestic economy if it continues, said economist Richard Clinch, director of the Jacob France Institute at the University of Baltimore.

"The gyrations of the stock market could impede the strength of the domestic market if this turns into a full-blown meltdown," Clinch said. "The impacts are consumers are going to feel less wealthy, and consumer spending has been what's driving the economy."

The U.S. economy has been heavily dependent on consumer spending since recovering from the recession that followed the housing market crash and the financial crisis, Clinch said.

As China's economy slows, it could import less coal, which could affect Maryland's coal industry and the port of Baltimore, said Daraius Irani, chief economist at Towson University's Regional Economic Studies Institute.

But average Americans should not worry too much about the stock market right now, Irani said. The volatility is "more noise than really anything," he said.

Besides the growing talk of a possible bear market, the dropping oil prices and China woes, 2016 is a U.S. election year, which historically can cause market angst.

"There's enough little things and the market reacts to those jitters, and we're in an election year, which adds uncertainty," said Karyl Leggio, a finance professor at Loyola University Maryland. "When we get a few cases of bad news, especially when it's in different segments of the market, it can accelerate concern."

Still, she added, the downturn offers a good buying opportunity.

"My reaction to negative is, 'OK, let's put more money into the market,'" Leggio said.

The silver lining to falling crude oil prices is lower prices at the gas pump. Maryland's average price for regular unleaded is $1.93 per gallon, down 32 cents from the same time last year, according to AAA Mid-Atlantic.

While experts chalked up the U.S. stock market gyrations to global issues, not all of the domestic news was good. U.S. industrial production fell in December for the third month in a row, followed by retail sales, which slipped 0.1 percent after increasing 0.4 percent in November, according to the Commerce Department. For the full year, retail sales rose 2.1 percent, the lowest since 2009.

The volatility and uncertainty could dissuade the Federal Reserve from continuing to raise interest rates in 2016 as quickly as predicted. Rising interest rates can act as a brake on the economy as the cost of borrowing increases for businesses and consumers. The central bank has signaled previously that it would take it slow if certain indicators started to falter.

Gary Williams, president and CEO of Columbia-based Williams Asset Management, said the current correction "may not be the bottom," but investors shouldn't panic.

"When people are losing money, it's always emotional, and they haven't seen this steep a drop, especially at the beginning of the year, in a while," Williams said. "Investors have gotten used to pullbacks here and there, and it always seems different and it always seems like the sky is falling, but we've learned that the sky isn't falling. It will ultimately get better, but it does require patience."

cwells@baltsun.com

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