More signs of distress in China's economy and rising bond yields led to a broad sell-off in world stocks overnight, leaving key market indexes down more than 5 per cent from their record highs last month.
It was the first 5 per cent decline - referred to on Wall Street as a "pullback" - since November.
Pullbacks that occur during bull markets tend to be "nasty and brutish" but short, said John Manley, chief equity strategist at Wells Fargo Funds Management. He said it's common to get declines of 3 per cent to 7 per cent "as the market restores a reverence to risk to the investing public."
US trading started with a slump on Monday. The market recovered much of its loss, then fell back again. By the close of trading the big stock indexes were clinging to modest gains for the second quarter, which ends Friday.
Before Wall Street opened for trading on Monday, Asian markets were already sharply lower, led by a 5 per cent plunge in China's Shanghai Composite Index. That was the index's biggest loss in four years. The decline was prompted by a government crackdown on off-balance sheet lending, which made investors worry about China's economic growth. The selling spread to Europe, where France's benchmark stock index fell 1.7 per cent, Germany's 1.2 per cent.
US traders took one look at that and started dumping stocks. The Dow Jones industrial average fell as much as 248 points in the first hour of trading. The yield on the 10-year Treasury note spiked to its highest in almost two years as the sell-off brought down prices of US government debt. Gold and other metals also fell.
Stocks got closer to break-even around midday before falling again in the last hour. The Dow finished down 139.84 points, or 0.9 per cent, at 14,659.56. The S&P 500 index fell 19.34 points, or 1.2 per cent, to 1,573.09. The Nasdaq dropped 36.49 points, or 1.1 per cent, to 3,320.76.
All 10 industry groups in the S&P 500 fell. The biggest drop was 1.8 per cent for bank and financial stocks. Bank of America fell the most among major bank stocks, giving up US39 cents, or 3.1 per cent, to $12.30.
The S&P 500 is down 5.7 per cent from its all-time of 1,669 on May 21. The Nasdaq has fallen 5.2 from its own recent high on that day.
Markets remain vulnerable to any comments from the Federal Reserve about its $US85 billion in monthly bond purchases, which have kept interest rates at historic lows and helped drive the stock market's rally the last four years. On Wednesday and Thursday, the S&P plunged 3.9 per cent after the central bank said its bond-buying program could wrap up by the middle of next year as long as economic conditions continue to improve. Stocks edged up Friday, but still had their worst week in two months.
"I think investors are overreacting to the prospects of a change in Fed policy," Thayer said. He noted that unemployment is down, inflation is low. "These are good economic conditions."
Gold fell $14.90, or 1.2 per cent, to $1,277.10. Other metals were down, too. Crude oil rose $1.49, or 1.6 per cent, to $95.18 per barrel.
Since starting its bull run in March 2009, the S&P 500 has had seven pullbacks of between 5 and 9 per cent and two corrections, decline of 10 per cent to 19.9 per cent. So far, the market has come back stronger from each setback. The S&P is still up 133 per cent during this four-year bull market.
"Pullbacks are a natural occurrence in markets," said Janet Engels, senior vice president and director of the private client research group at RBC Wealth Management. "We likely have further to go."
The last time the US stock market had a full-blown correction defined as a drop of at least 10 per cent from a peak was July 22-Oct. 3, 2011, when the S&P 500 fell 18.3 per cent. That fall was caused by concern that a fight between US lawmakers over extending the debt ceiling would push the US into default.
The yield on the 10-year note was unchanged from late Friday at 2.54 per cent. Earlier in the day it was at 2.67, its highest level in almost two years. The yield has surged from its 2013 low of 1.63 per cent on May 3. The increase accelerated last week after the Fed laid out the possible timetable for curtailing its bond-buying program. Yields rise when demand for bonds weakens.
The Fed's easy-money policies have kept bond yields and other interest rates artificially low since the financial crisis of 2008, making borrowing cheaper. The 10-year yield is used as a benchmark for many kinds of loans to individuals and businesses, including home mortgages.
The last time the yield was above 3 per cent was late July, 2011. The last time it was consistently above 4 per cent was July 2008, two months before the peak of the financial crisis.
Other stocks with big moves included:
PulteGroup slumped 50 cents, or 2.7 per cent, to $18.31. Investors have worried that higher US interest rates will hurt homebuilding companies by making mortgages more expensive.
Tenet Healthcare rose $1.88, or 4.5 per cent, to $43.73 after offering to buy Vanguard Health Systems Inc. for $1.8 billion. The offer of $21 per share pushed Vanguard stock up $8.33, or 67 per cent, to $20.70.
Facebook fell 60 cents, or 2.4 per cent, to $23.93. Monday was the first full trading day after Facebook acknowledged it had accidentally exposed contact information for 6 million users to some other users.
Apple fell $10.96, or 2.7 per cent, to $402.50 after an analyst said the company appears to have cut back iPhone production. The company didn't have any immediate comment.