The Dow Jones industrial average plunged more than 1,100 points today as stocks took their worst loss in six and a half years. Two days of steep losses have erased the market's gains from the start of this year and ended a period of record-setting calm for stocks.
The Dow finished down 1,175.21 points, or 4.6 per cent, at 24,345.75. The Standard & Poor's 500 index fell 113.19 points, or 4.1 per cent, to 2,648.94.
Market watchers expect New Zealand's sharemarket to follow the US lead and fall tomorrow, with the local market closed today. However, they say the fundamentals of the market are still strong.
The global rout smashed the Australian sharemarket, which plunged 3.81 per cent close to end of trading today, following a A$30 billion ($32.4b) loss on Monday.
"It is an actual bloodbath," Charles Schwab market analyst Ben Le Brun told AAP.
"Wall Street has had an appetite for stocks for years on end so it has just been going up in steps and now we are looking at nothing more than a pullback. So, of course, there is fallout here in Australia."
In New Zealand, Craigs Investment Partners head of private wealth research Mark Lister said it had been a "wild ride".
"There's a bit of an air of panic when you look at what happened in the US markets overnight," Lister said.
"The other thing to put it into context is that markets have had a hell of a run, particularly in the US. It peaked pretty much last week and in the year leading up to that it had gone up some 25 per cent, so that's a massive move - to be honest it had gone a bit overboard," he said.
"People are getting a whiff of higher inflation, which is something we haven't seen for years. That's important because higher inflation means you might see central banks raise interest rates from the very low levels we've had for several years."
There were several positive things to point out. For example, global economic growth remained strong and there were no signs of recession anywhere.
"This is just Wall St doing its thing rather than a reflection on the wider economy."
It was probably a good thing the New Zealand market was closed for Waitangi Day because it would likely be "a pretty ugly sort of day I'd expect", Lister said.
However, New Zealand would play catch-up when the markets opened tomorrow and the stockmarket would "certainly be down".
"My guess would be that we would hold up better than some of these global markets because the New Zealand market hasn't been quite as strong as others around the world.
"We'll still feel the brunt of it because we do follow those big global markets but we'll probably be down less. We tend to be a less volatile market - we've got lots of quite stable, predictable companies on our market."
These tended to hold up better in tough times, Lister said.
Harbour Asset Management portfolio manager Shane Solly agreed that the market was "letting off steam" after a prolonged period of being incredibly strong.
"We're getting a bit stretched and this is part of a normal cycle of a capital market - it has to let off steam," Solly said.
"But when you take the punch away from the party, some people are going to be unhappy. That's what we're seeing now, it's maybe happening a bit earlier than expected and they're thinking, 'Hmm, maybe the party's over'."
There was no indication that the world was heading into another financial meltdown, with most companies having stronger balance sheets than they did in 2008.
"Most financial institutions, in particular the banks, have far more robust lending policies and so forth and so there's a big difference now in terms of structures and processes," Solly said.
"But technology change and business disruption, we think that's the risk for some companies ... because all markets lifted up on low interest rates and easy money. Now we might see a few more companies that are not as well prepared for this."
There were some New Zealand companies that needed to do more to protect their positions and perhaps make some hard decisions in this new environment.
Solly said it would be a far more volatile year ahead for investors than the past 12 months.
In Australia, AMP Capital chief economist Shane Oliver said the correction was long overdue.
"I really think it was something that was due to happen," he said. "There was a combination of things — the triggers have been worries about rising inflation, a more aggressive US Federal Reserve and higher bond yields.
"And it's come at a time when the US market was vulnerable to a correction because it's been a long time since it's seen a decent pullback — through the course of last year there was no pullback greater than 3 per cent."
CMC Markets chief market analyst Ric Spooner said despite the heavy falls on the ASX, there could be a sharp rebound in coming days courtesy of bargain hunters.
"Once it becomes volatile like this the chances are it will stay volatile," he said.
"That means we could see some relatively large moves in either direction. Personally I think we are getting into the valuation zones where bargain hunters will start to get interested in our market, particularly with reporting season coming up."
Prior to the market opening Australian government ministers remained upbeat about the Australia's economic outlook in the face of the massive sell-off of shares in the US.
Australian Treasurer Scott Morrison believes the big dive on the US stockmarket is a recalibration associated with recent economic data.
He told reporters in Canberra the market was reacting to last week's US wage data and more bullish sentiment about what's happening with inflation and its impact on bond markets.
"Markets are volatile - when they recalibrate in relation to events like this you do see a bit of these events happening," he said. "But people who watch these markets more and participate in them more closely than I do, I think, will see this for what it is and understand the forces behind it."
Sharemarket volatility aside, Trade Minister Steven Ciobo said the Australian economy was behaving "exceptionally strongly".
"We are seeking really strong economic growth in Australia, we are seeing great employment creation," he told Sky News.
Key equity markets in the US, Europe, Britain and Asia — bar China — have all declined sharply, with Wall Street the worst performer. US stocks have been under pressure for the last week as investors weigh the risks of more Federal Reserve interest rate hikes following strong economic data.
Britain's FTSE 100 lost 1.5 per cent while France's CAC 40 slid 1.5 per cent. The DAX in Germany shed 0.8 per cent. Japan's benchmark Nikkei 225 tumbled 2.6 per cent and the South Korean Kospi shed 1.3 per cent. Hong Kong's Hang Seng index sank 1.1 per cent.
In the US banks fared the worst as bond yields and interest rates nosedived. Health care, technology and industrial companies all took outsize losses and energy companies sank with oil prices.
At its lowest ebb, the Dow was down 1,597 points from Friday's close. That came during a 15-minute stretch where the 30-stock index lost 700 points and then gained them back.
Market pros have been predicting a pullback for some time, noting that declines of 10 per cent or more are common during bull markets. There hasn't been one in two years, and by many measures stocks had been looking expensive.
"It's like a kid at a child's party who, after an afternoon of cake and ice cream, eats one more cookie and that puts them over the edge," said David Kelly, the chief global strategist for JPMorgan Asset Management.
It's like a kid at a child's party who, after an afternoon of cake and ice cream, eats one more cookie and that puts them over the edge.
Kelly said the signs of inflation and rising rates are not as bad as they looked, but after the market's big gains in 2017 and early 2018, stocks were overdue for a drop.
The Dow finished down 1,175.21 points, or 4.6 per cent, at 24,345.75.
The Standard & Poor's 500 index, the benchmark most professional investors and many index funds use, skidded 113.19 points, or 4.1 per cent, to 2,648.94. That was its biggest loss since August 2011, when investors were fearful about European government debt and the US came close to breaching its debt ceiling.
The Nasdaq composite fell 273.42 points, or 3.8 per cent, to 6,967.53. The Russell 2000 index of smaller-company stocks sank 56.18 points, or 3.6 per cent, for 1,491.09.
The slump began on Friday as investors worried that creeping signs of higher inflation and interest rates could derail the US economy along with the market's record-setting rally. Energy companies, banks, and industrial firms are taking some of the worst losses.
The S&P 500 has fallen 7.8 per cent since January 26, when it set its latest record high. Investors are worried about evidence of rising inflation in the US Increased inflation might push the Federal Reserve to raise interest rates more quickly, which could slow down economic growth by making it make it more expensive for people and businesses to borrow money. And bond yields haven't been this high in years. That's making bonds more appealing to investors compared with stocks.
The stockmarket has been unusually calm for more than a year. The combination of economic growth in the US and other major economies, low interest rates, and support from central banks meant stocks could keep rising steadily without a lot of bumps along the way. Experts have been warning that wouldn't last forever.
As bad as Monday's drop is, the market saw worse days during the financial crisis. The Dow's 777-point plunge in September 2008 was equivalent to 7 per cent, far bigger than today's decline.
Stocks hadn't suffered a 5 per cent drop since the two days after Britain voted to leave the European Union in June 2016. They recovered those losses within days.
The last 10 per cent drop for markets came in early 2016, when oil prices were plunging as investors worried about a drop in global growth, which could have sharply reduced demand. US crude hit a low of about US$26 a barrel in February of that year.
A drop of 10 per cent from a peak is referred to on Wall Street as a "correction".
Wells Fargo sank US$5.91, or 9.2 per cent, to US$58.16. Late Friday the Fed said it will freeze Wells Fargo's assets at the level where they stood at the end of last year until it can demonstrate improved internal controls. The San Francisco bank also agreed to remove four directors from its board.
Benchmark US crude oil fell US$1.30, or 2 per cent, to US$64.15 a barrel in New York. Brent crude, the standard for international oil prices, lost US96c, or 1.4 per cent, to US$67.62 a barrel in London.
Bond prices tumbled after moving sharply higher on Friday. The yield on the 10-year Treasury slipped to 2.73 per cent from 2.84 per cent. That hurt banks by sending interest rates lower, which means banks can't charge as much money for mortgages and other types of loans.
- NZ Herald, AP, AAP, news.com.au