Fears Rise That Plunging Stocks Could Pose Risk to Economy if volatility continues
Major U.S. stock indexes plummeted Friday after a worldwide sell-off overnight triggered by another slide in oil prices, raising concerns about possible spillover effects on the nation’s still-recovering economy.
The Dow Jones industrial average closed down 391 points, or about 2.4 percent, to 15,988.08, a level it had not been at since August. The Dow was down more than 500 points before recovering somewhat.
The Standard & Poor’s 500 index declined about 2 percent, falling about 41.55 points to below 1,880.29.
The Nasdaq, which is heavily focused on technology stocks, fell nearly 4 percent. The index closed below 4,500 for the first time since 2014.
The market turmoil was an acceleration of a downturn that began with the new year, ignited by troubles in China’s economy and stock market. So far this year, the major U.S. indexes are down sharply.
And if the trend continues, economists said it could rattle consumer confidence. That could lead them to spend less, which in turn could hurt business growth and investment.
“Volatility, constant headlines about increased risk of recession and a slowing global economy is going to make the average American very nervous,” said Lindsey M. Piegza, chief economist at brokerage firm Stifel Nicolaus & Co.
She expects the U.S. economy will grow at about the same 2 percent rate this year as it did last year.
The risk of recession this year is at a low 15 percent, but those forecasts could change if the volatility continues, she said.
“It’s going to be very difficult for the economy to punch out even 2 percent (growth) if we don’t see the consumer happy, healthy and out in the marketplace spending,” Piegza said.
Consumer confidence so far this month is up slightly from December, according to preliminary data released Friday from Thomson Reuters and the University of Michigan.
But economists said it’s too soon for the effects of the market volatility to hit consumers.
“The fundamentals driving consumer spending and housing are intact,” said Gary Schlossberg, senior economist at Wells Capital Management, noting low gas prices and recent signs of wage growth. “But when you see the turmoil, that could have an unnerving effect.”
The turmoil on Wall Street came after markets in Asia and Europe tumbled.
China’s benchmark Shanghai composite index, which triggered this month’s volatility, fell 3.6 percent. The index is down about 20 percent from its recent high, reached in late December. The latest decline came after a report that some banks had stopped accepting some stocks as collateral for loans.
The U.S. sell-off also was fueled by disappointing economic data.
The Commerce Department said retail sales fell 0.1 percent in December from the previous month. And the Federal Reserve reported that industrial production declined 0.4 percent.
“The economy got hit from all sides in December with factory activity sputtering and consumers taking fewer trips to the mall,” said Chris Rupkey, chief financial economist at Union Bank in New York.
“If these weak data keep going into 2016, the outlook is going to grow even dimmer given the recent financial market turbulence and the fears over what a slowdown in China means for the rest of the world,” he said.
The weak December retail sales hit investors particularly hard because consumer spending — supported by solid job growth — has been the main factor behind the positive outlook for the American economy.
The concern now is that consumers, particularly wealthier ones, will pull back as a result of stock market losses and fears of a sharp slowdown in economic growth, or worse an impending recession.
What’s especially disconcerting is that the American economy today depends a lot more on high-income consumers than decades earlier, and it is precisely those households that own the bulk of the stocks and will be prone to cut back as their portfolio values shrink.
From the bottom of the Great Recession in 2009 to 2012, consumption of the top 5 percent of U.S. households grew almost 14 percent, while spending by the bottom 95 percent rose a meager 3 percent, according to research by economists Steven Fazzari at Washington University and Barry Cynamon at the Federal Reserve Bank of St. Louis.