A meltdown in emerging markets took a toll on the U.S. stock market Friday, sending the Dow Jones Industrial Average plummeting by more than 300 points.
The Dow’s drop added to substantial declines earlier in the week and left it with a loss for the full week of close to 4 percent, the worst week in nearly two years. Other major U.S. stock indexes also suffered heavy declines.
The market turmoil started on Thursday, triggered by signs of a setback in China’s massive manufacturing sector, which has been the engine of growth for much of the rest of the world since the Great Recession. Exports to China also have been a bright spot for the U.S. economy.
Emerging markets such as Argentina, Russia,, South Africa and Turkey also got pummeled by worries about the Federal Reserve’s campaign to slowly close the spigot of easy money that has been stoking rallies in stocks and bonds from one end of the globe to the other, including on Wall Street.
Add to that a currency crisis in Argentina, which devalued its currency by 12 percent in one day, a political and economic crisis in Turkey, and political turmoil in other emerging countries, and a toxic brew developed that is upsetting global markets, with stocks, bonds and currencies all nosediving.
“It’s a mess,” said currency strategist Andrew Busch. “The emerging market contagion is ragin’.”
He noted that, among other worries plaguing the markets, investors fear that interest rates have bottomed out after years of decline and are headed inexorably up in the wake of the Fed’s decision to end its extraordinary stimulus campaign. The Fed is expected to cut its purchases of U.S. bonds by another $10 billion later this month.
“The markets are on edge and thankful for the weekend,” which should at least temporarily put a stop to the rout, said investment analyst Marc Chandler.
He attributed some of the selloff in U.S. markets to worries that another confrontation will develop between President Obama and House Republicans next month over his health care program and raising the national debt limit, which is due to expire in early February.
The Republicans’ “initial feint is to seek a number of specific changes in the Affordable Care Act, renewing fears of a repeat of last October,” when a standoff between the two parties resulted in a 16-day government shutdown, he said.
Blaming the Fed for the market meltdown is not entirely fair, he said.
“We are sympathetic to arguments that higher interest rates and a reduction of global liquidity would hurt those emerging markets that rely on external financing [for their current account deficits], but the problems in Turkey or Thailand, or Venezuela or Argentina, or the Ukraine, don’t have much to do with Fed policy,” he said, noting each of those countries have been roiled by its own internal political and economic problems.
Whatever the cause, the damage was considerable on global bourses.
The Dow ended a tumultuous day of trading down 318 points at 15,879, a a one-day drop of nearly 2 percent. Declining U.S. stocks outnumbered rising ones 6-to-1 on the New York Stock Exchange, and all 10 industry groups in the Standard & Poor’s 500 blue-chip stock index fell.
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.