Fear is back in the market.
Investors are worried about slower economic growth in China, a gloomier outlook for U.S. corporate profits and an end to easy money policies in the United States and Europe. They're also fretting over country-specific troubles around the world — from economic mismanagement in Argentina to political instability in Turkey.
Those fears converged to start a two-day rout in global markets this week, capped by a 318.24-point drop Friday in the Dow Jones Industrial Average, the blue chip index's worst day since last June. Despite the selloff, U.S. stocks remain near all-time highs after surging 30 percent last year. The S&P 500 is 3 percent below its record high of 1,848 on Jan. 15.
The turbulence coincides with a global economic shift: China and other emerging market economies appear to be running into trouble just as the developed economies of the United States and Europe finally show signs of renewed strength nearly five years after the end of the Great Recession.
The pessimism in the markets came after a nearly unbroken market rally that has lasted for months. Many strategists had been anticipating some kind of pullback.
Charles Diebel, head of market strategy at Lloyds Banking in London, said investors who had been enjoying high-risk, high-return investments were now leaving emerging markets and equities and into the perceived safety of U.S., German and British government bonds.
The trouble began Thursday after a January survey showed a drop in Chinese manufacturing activity. Slower growth in China is bad news for countries that supply oil, iron ore and other raw materials to the world's second-biggest economy. Some of those countries, such as Indonesia and South Africa, were already struggling with an outflow of capital as rising U.S. interest rates drew investors to the United States.
A major factor in this week's global stock selloff is the U.S. Federal Reserve's recent decision to reduce its monthly bond purchases to $75 billion from $85 billion. That move has hit some emerging markets hard. When the Fed was pushing U.S. rates lower, emerging markets had seen an inflow of capital from investors seeking higher returns than they could get in the United States. Now investment is flowing back to America, hammering currencies in emerging markets.
The South African rand, Russian ruble, Turkish lira, and especially the Argentinian peso — which fell 13 percent Thursday — have been "trounced," said Jane Foley, a currency strategist at Rabobank.
In the United States, the outlook for corporate profits has already been weakening, and the turmoil in emerging-market currencies could make matters worse. About two-thirds of the 123 S&P 500 companies that have reported fourth-quarter earnings so far have beaten analysts' estimates, according to S&P Capital IQ, in line with the historical average. But the forecasts for income growth have been falling and could decline further.