U.S. stocks suffered steep declines but closed well off their lows Thursday after the arrest of a top Chinese tech executive fanned trade war worries and a swoon in oil prices worsened fears about the health of the global economy.
Investors hoping for stability after the Dow Jones industrial average's nearly 800-point fall two days ago instead were taken on a wild ride. They watched the gauge of blue-chip stocks retreat as much as 784 points, or 3.1 percent, on Thursday, before closing down just 79 points, or 0.3 percent, at 24,948. The Dow is still up about 1 percent this year.
Market volatility and wild price swings have returned to Wall Street this year, spooking investors who still have bad memories of the 2008-09 financial crisis that wiped out more than half of the stock market's value.
The broad Standard & Poor's 500 stock index, which slid 0.2 percent Thursday, has closed up or down more than 2 percent on 14 trading days in 2018, the most in seven years, according to data from S&P Dow Jones Indices. Last year, there wasn't a single day with a move of 2 percent or more.
"Volatility is back because investors have a lot of questions: Will the trade war escalate? Will the Fed hike rates too far? Will these factors tip the economy into recession?" says Alan Skrainka, chief investment officer at Cornerstone Wealth Management.
3 things driving stocks lower
1. Trade war angst. The initial optimism following the trade fight cease-fire between the U.S. and China at the G-20 summit this past weekend has faded. There's rising skepticism about whether a deal to resolve the fight over tariffs, as well as other disputes, can be reached during the 90-day pause.
The arrest of Meng Wanzhou, the chief financial officer and founder's daughter at Huawei, China's largest telecommunications equipment maker, complicated matters. The episode raises worries of more harm to the trade truce between the world's two largest economies, Jasper Lawler, head of research at London Capital Group, told USA TODAY via email.
2. Fear of rising rates and a recession. The nearly 10-year-old bull market has been fueled by low borrowing costs. Now, Wall Street fears that the Federal Reserve will hike rates too high and too fast and cause a recession. Just a week after investors breathed a sigh of relief when Fed chief Jerome Powell hinted that the Fed will slow its pace of rate increases next year, an obscure shift in the bond market that signals a possible economic contraction spooked investors anew this week.
The negative fallout from the U.S.-China trade dispute is another economic obstacle. Ongoing trade tensions are causing a lot of uncertainty and are exacerbating worries about slowing growth, as tariffs result in higher prices for goods, hurting sales and earnings of U.S. companies.
3. Sinking oil prices. U.S.-produced crude has been in free-fall for weeks due to a supply gut and waning demand. But sinking oil prices also raise concerns about an economic slowdown. That's why Wall Street was closely watching Thursday's OPEC meeting to see if the oil cartel could agree on a daily production cut to help stabilize prices. OPEC, however, didn't announce its decision.
The price of U.S.-produced crude was down 2.3 percent Thursday at $51.70 a barrel, compared with its recent high of $76 in early October.
3 things an investor should do
1. Avoid over-reacting. Nobody can control where stock prices go. Instead, "focus on what you can control," says Skrainka. His short list? Own quality stocks. Diversify your investments. Control your emotions. And maintain a long-term perspective.
2. Prepare for a bear market. Taking a page from Warren Buffett, who says only buy stocks you wouldn't mind owning if the stock market shut down, Skrainka says the best way to survive a nasty downturn is "by only owning investments today that you wouldn’t mind owning in a bear market tomorrow." In short, don't own risky stuff that will keep you up at night.
3. Don't focus on short-term. "In spite of a disappointing year, a diversified portfolio has performed quite well over the past five years," Skrainka reminds investors. A portfolio with 53 percent invested in U.S. stocks, 17 percent in foreign stocks and 30 percent in intermediate bonds has posted a loss of 1.8 percent this year. But that same portfolio, he notes, has provided a return of 9.8 percent annually over the past 10 years.
At the market close Thursday, the recent damage to the major U.S. stock indexes was starting to add up. The technology-stock-packed Nasdaq composite is down 11.3 percent from its late-August peak, putting it deeply into so-called "correction" territory, defined as a drop of 10 percent or more from a prior high. The Dow is 7 percent off its record close, and the broad Standard & Poor's 500 closed 8 percent below its peak. The S&P 500 has already suffered two corrections this year, one in February and another in late November.
This article originally appeared on USA TODAY: Dow Jones industrial average drops as trade fight, oil price and recession worries mount