A strong rally on Wall Street evaporated and turned into losses, as concerns about China’s economy heavily outweighed lower valuations that some investors earlier saw as bargains.
NEW YORK, NEW YORK, UNITED STATES (AUGUST 25, 2015) (NYSE) – A strong rally on Wall Street evaporated on Tuesday (August 25) and stocks ended with deep losses as concerns about China’s economy outweighed lower valuations that some saw earlier as bargains.
In a dramatic trading session, major indices turned negative in the final minutes of trading after previously climbing almost 3 percent.
Investors cited more worries that a slowdown in China could hobble global growth, even after the country’s central bank cut interest rates on Tuesday for the second time in two months. The move came after Chinese stocks slumped 8 percent on Tuesday, on top of an 8.5 percent drop on Monday.
“Even though we have slow GDP growth here in North America, less than 3 percent, everybody was pretty comfortable paying 20 multiple because the companies were getting growth in other markets like India, like Asia, like China,” said Kevin O’Leary, founder Of O’Leary Financial Group and co-star of U.S. reality television show “Shark Tank.”
“And everybody was happy to pay that premium until last week, when the first cracks came into the China growth story. Instead of thinking about China growing at 8 percent, some think it’s going to grow at 5 or 6 percent, that’s 20 percent less growth than anticipated. All of a sudden, investors are no longer interested in paying 20 PE if the true growth of those international markets represented half of the sales of the S&P aren’t going to be what was advertised, that’s why this market corrected.”
“Well the Chinese government really gave us a helping hand last night,” said Nicholas Colas, chief market strategist for Convergex.
“The People’s Bank of China cut interest rates. That’s the same as when the Federal Reserve or the ECB (European Central Bank) cuts rates and it really helps asset prices so from worrying about the Chinese economy intensely yesterday, now we’re thinking, ‘okay, they’re finally on the case, finally trying to make things work a little better there.'”
Tuesday’s drop followed steeper losses on Monday, when the Dow Jones industrial average fell more than 1,000 points at its lows and the S&P 500 recorded its worst day since 2011.
In the past week, the S&P has lost 11 percent.
The Dow Jones industrial average fell 204.91 points, or 1.29 percent, to end at 15,666.44.
The S&P 500 lost 25.59 points, or 1.35 percent, to finish at 1,867.62 and the Nasdaq Composite dropped 19.76 points, or 0.44 percent, to 4,506.49.
Earlier, the S&P rose as much 2.9 percent, the Dow as much as 2.8 percent and the Nasdaq as much as 3.6 percent.
JPMorgan cut its year-end target for the S&P 500 to 2,150 from 2,250.
All of the 10 major S&P sectors were lower, with the utilities index’s 3.2-percent drop leading the decline.
Pepco Holdings Inc fell 16.47 percent after a District of Columbia regulator denied Exelon Corp’s $6.8 billion bid for the power utility, possibly delivering a knockout blow to the deal.
Monday’s pummelling pushed the S&P 500’s valuation down to about 15 times expected earnings, compared to around 17 for much of 2015 and just above a 10-year average of 14.7, according to Thomson Reuters StarMine.
Data on Tuesday showed U.S. consumer confidence increased to a seven-month high in August. New U.S. single-family home sales rebounded in July, adding to evidence of underlying strength in the economy that could allow the Federal Reserve to raise interest rates this year.
Best Buy jumped 12.57 percent after the owner of the biggest U.S. electronics chain reported an unexpected increase in quarterly sales.
Decliners outnumbered rising stocks on the NYSE by 1,721 to 1,384. On the Nasdaq, 1,480 issues fell and 1,379 advanced.
The S&P 500 index showed just one new 52-week high and 47 new lows, while the Nasdaq recorded seven new highs and 125 new lows.
Volume was heavy, with about 10.4 billion shares traded on U.S. exchanges, far above the 7.5 billion average this month, according to BATS Global Markets.