U.S. stocks slumped on Wednesday as the price of oil suffered its worst one-day drop since September. A huge sell-off earlier in the day pushed the Standard & Poor’s 500 index to its lowest level in almost two years.
Investors are worried that low oil prices mean there’s not that much demand for fuel. That would be a sign that growth in the global economy is slowing down. Stocks in the U.S. started sharply lower, following widespread selling overseas, and at one point the Dow Jones industrial average fell as much as 565 points.
After a late recovery, the Dow closed down 249.28 points, or 1.6 per cent, to 15,766.74. The S&P 500 index fell 22 points, or 1.2 per cent, to 1,859.33. The Nasdaq composite, which briefly turned positive in the afternoon, lost 5.26 points, or 0.1 per cent, to 4,471.69.
U.S. crude dropped $1.91, or 6.7 per cent, to $26.55 a barrel in New York. That was the biggest one-day plunge for U.S. oil since September 1, 2015. U.S. crude is down 28 per cent in 2016 and is trading at its lowest level since May 2003.
Brent crude, a benchmark for international oils, fell 88 cents, or 3.1 per cent, to $27.88 a barrel in London.
James Liu, global market strategist for JPMorgan Funds, said demand for oil hasn’t fallen off and the global economy remains relatively healthy. But companies are still producing a great deal of oil, so tremendous stockpiles have accumulated. While companies started shutting down drilling rigs and wells in late 2014 after prices started to decline, production of oil didn’t change much.
Mr. Liu predicted production will keep falling and oil prices will stabilise in the middle of 2016, then start rising. “I think that will alleviate some market concerns,” Mr. Liu said.
The falling price of oil is bad news for companies that drill for oil and sell it, and those companies have slashed jobs and cut back on work to reduce their costs. Banks have lent billions of dollars to energy companies to fund their work, and investors are worried the banks won’t get their money back. It’s good news, however, for car owners and for companies that use a lot of fuel.
Energy stocks were pelted. Devon Energy lost $1.89, or 8 per cent, to $21.49 and Exxon Mobil sank $3.22, or 4.2 per cent, to $73.18. Financial stocks were also hit because banks could lose billions on loans to oil and gas companies. Bank of America lost 55 cents, or 3.9 per cent, to $13.69.
Gold and U.S. government bonds, traditional safe havens, rose in value as investors shifted money out of stocks.
Overseas markets also fell. Japan’s Nikkei index entered a bear market, down 20 per cent from its peak in June, and European benchmarks lost between 3 and 4 per cent.
Jack Ablin, chief investment officer of BMO Private Bank, said he thinks stocks will fall a bit further, but he doesn’t expect a global collapse. Mr. Ablin said that for years, investors bought stocks without too much regard for risk. He said investors felt that if things ever got too bad, the Federal Reserve would help prop up the market.
“Investors were comfortable taking outsize risks, not because they had earnings to fall back on, but because they had the Fed to fall back on,” Mr. Ablin said. So stocks made huge gains in the years since the financial crisis while the U.S. economy churned out years of steady but unspectacular growth.
U.S. government bond prices rose as traders shifted money into lower-risk investments. The yield on the 10-year Treasury note dropped to 1.99 per cent, its lowest level since October, from 2.06 per cent a day earlier. That yield, which is a benchmark for setting interest rates on home mortgages and other kinds of loans, has fallen sharply since the beginning of the year. At the end of 2015 it stood at 2.30 per cent.
The price of gold rose $17.10, or 1.6 per cent, to $1,106.20. While gold is far below its prices from the financial crisis, it’s up 4 per cent in 2016. The price of silver added 3.9 cents to $14.16 an ounce, and is up almost 3 per cent for the year. Copper slipped 1.8 cents to $1.96 a pound and is down 8 per cent for the year.
Japan’s Nikkei fell 3.7 per cent and is down more than 20 per cent from its June peak. Hong Kong’s Hang Seng retreated 3.8 per cent. The Shanghai Composite Index lost 1 per cent. In Europe, Germany’s DAX tumbled 2.8 per cent and France’s CAC-40 shed 3.5 per cent. Britain’s FTSE 100 sank 3.5 per cent.
