[NEW YORK] In some ways, it was worse than Monday.
Stock bulls looking for a respite from the worst declines since 2011 instead had to watch as a 442-point rally in the Dow Jones Industrial Average vanished in the final hour. The tumble, stretching to 4 per cent from the day's highest level, dashed hopes that China's interest-rate cut would put a floor under US equities.
Concern bubbled over as the day progressed that fresh stimulus in China wouldn't be enough to prop up its stock market, where the Shanghai Composite Index has lost 22 per cent in four days. Exchange-traded funds tracking China's A-shares pared gains of as much as 5.2 per cent in US trading, halting a rally earlier in the day spurred by policy makers cutting interest rates for a fifth time since November.
"People don't want to be holding stocks overnight," said Peter Jankovskis, who helps oversee US$1.9 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments. "There's certainly a chance that the selloff could deepen. It all depends on what happens in the Chinese market tomorrow." At its current level, down 9.3 per cent on the year to 1,867.61, the Standard & Poor's 500 Index is 1 per cent away from erasing its gains since the end of 2013. It's also about 5 points above the lowest level of its last big tumble, 1,862.49 from Oct 15. The measure has lost 11 per cent in five days, the fiercest bout of selling since the US was stripped of its AAA credit rating by S&P in August 2011.
As an illustration of its downward momentum, the gauge is trading more than 10 per cent below its average price in the last 200 days, a level of depression it's occupied only once since the bull market began. That was also in 2011, in the midst of a five-month swoon that erased 19 per cent from the index. Tuesday's decline was the biggest reversal of a rally since Oct 29, 2008.
"Just because the market is oversold doesn't mean it can't go lower," said Paul Zemsky, head of multi-asset strategies at Voya Investment Management LLC, which oversees US$218 billion. Mr Zemsky predicted declines could persist until the S&P 500 gets to the lowest level reached Monday in futures tracking the gauge, which was 1,830.
"I'd say we'll hold that low," Mr Zemsky said. "That's a 1.5 per cent move from here. The market is in a near-term bottoming process and traders will turn to those technicals." Losses in equities are confounding some investors who say not enough has changed in the global economy since May to justify the velocity of the plunge. Tuesday showed consumer confidence rose to its second-highest level in eight years while new home sales climbed 5.4 per cent, the most in 2015.
At the same time, the rout is occurring at a time of deteriorating market sentiment and stagnant earnings. Owners of mutual and exchange-traded funds yanked US$78.8 billion from US shares in the first seven months of 2015, more than in any full year since at least 1993. Profits reported by S&P 500 companies in the second quarter fell 2 per cent from a year ago and are projected to slip 5.5 per cent in the current period.
"In all the years and the rallies I've seen, this one has the least amount of people chasing the pullback right now," Scott Wren, the senior equity strategist who helps oversee $1.4 trillion at Wells Fargo Advisors LLC in St. Louis, said by phone. "When you have these kind of dramatic sell-offs it takes some time to bottom - you test lows, you do it again and you form some kind of bottom. It'd be rare if the thing just bounced back." Tuesday's swoon dashed hopes that the previous day's close would prove a line in the sand for bulls. It came as all but nine companies in the S&P 500 are trading below their 12-month price targets set by equity analysts and at a time when the average forecasts of Wall Street strategists would require a rally of 20 per cent to achieve.
On average, stocks in the S&P 500 were 23 per cent below analyst estimates on Monday, compared with a 12 per cent discount as of last week.
"Can stocks fall further? Absolutely," said Kate Warne, an investment strategist at Edward Jones in St. Louis. Her firm manages about US$900 billion globally. "Historically, we see a 10 per cent pullback about once a year and it usually doesn't stop at 10 per cent. That doesn't say stocks are poorly valued, it says when fears take over we see sharp market moves."