The stock markets tumbled yesterday, capping the worst week on Wall Street in nearly two years, but experts say the sell-off is simply an adjustment, not a long overdue correction after recent strong growth.
Both the Dow Jones industrial average and the Standard & Poor's 500 closed down about 2 percent yesterday, ending the week down 2.6 and 3.5 percent, respectively. Yesterday's 318-point drop was the Dow's worst day since June. It plunged almost a combined 500 points yesterday and Thursday in a two-day rout.
A poor report on China's economy Thursday, which showed a manufacturing index had fallen to 49.6 indicating that it was shrinking, was a factor in the markets' decline. That report came on the heels of another that showed China's economic growth last year matched 2012 for the slowest pace since 1999.
Eric Teal, chief investment officer at First Citizens BancShares, said the foreign markets are weighing on American investors and stocks.
"Even a mild tremor in China's growth causes such anxiety around the world," said Eswar Prasad, a trade policy professor at Cornell University.
Christine Armstrong, senior vice president for Morgan Stanley in Boston, sees no cause for alarm in the markets' reaction to China's slowing growth.
"This is having to blow your nose during flu season," Armstrong said. "It doesn't really mean anything."
Armstrong said China's economic slowdown and the drop in the U.S. markets is an expected result of the Federal Reserve's tapering of its bond-buying program.
"Without quantitative easing, our interest rates are going up, so China isn't borrowing as much, because it's more expensive to borrow," Armstrong said. "This is normal, this is how it works. What we see right now is a regular adjustment."
The market is due for a 10 or 15 percent correction after unexpectedly strong growth last year, but this is not it, Armstrong said. There has not been a drop of 10 percent or more on Wall Street since October 2011. As tapering continues, though, there will continue to be small adjustments, she said. "When we sneeze, the rest of the world feels it," Armstrong said.
The Central Bank meets again next week, and is expected to continue to scale back its bond purchases.
Tapering has affected markets around the world, sending some currencies to record lows. Turkish, Argentinian and South African currencies all dropped significantly yesterday.
"The current environment is potentially very toxic for emerging markets," said Eamon Aghdasi, a strategist at Societe Generale SA.
Herald wire services contributed to this report.
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