Coverage: Dow drops 1,000 points; investors everywhere freak out

Black Monday is now a day that will be embedded in investors’ minds for some time, and while the day might be remembered for being black, the real color to be remembered is red.

Dramatically dropping a more than 1,000 points Monday morning, the Dow Jones Industrial Average followed suit of the huge drops experienced in overseas markets as uncertainty surrounding China increased.

Yian Q. Mui, Drew Harwell and Simon Denyer of The Washington Post summed up the day’s news:

A sharp stock market sell-off that began in Beijing clobbered Wall Street on Monday, sending shares plunging by record amounts amid renewed fears that the global economy is slowing down and world leaders are running out of ways to pump it back up.

“Black Monday,” Chinese state media tweeted as markets there tumbled nearly 8.5 percent. The turmoil drove other Asian indexes down to three-year lows and knocked European markets off by as much as 5 percent. On Wall Street, the Dow Jones industrial average plummeted more than 1,000 points — a historic nose dive — just minutes after the opening bell rang. Stocks then staged a dramatic turnaround but stumbled again in the afternoon to close nearly 600 points in the red. The sell-off and ensuing chaos bruised every industry. Some of the biggest U.S. companies have shed tens of billions of dollars in market value in only a few days.

The benchmark Shanghai Composite index opened lower again on Tuesday, and was down 4.5 percent at 10:15 a.m. local time. But other Asian markets recovered ground after Monday’s sell-off. Japan’s Nikkei 225 index was up 0.76 percent in mid-morning trade in Tokyo, while Hong Kong’s Hang Seng index was 2.13 percent higher.

Monday’s jaw-dropping swings reflected the level of investor anxiety over the status of the world’s recovery from the 2008 financial crisis. China’s breakneck expansion has cooled off, but unlike on previous occasions, government officials have done little to intervene so far. Adding to the uncertainty is the prospect of interest rate increases in the United States and the United Kingdom that some analysts worry could derail progress in two of the global economy’s bright spots.

“This is all about fears of a hard landing in China,” said Campbell R. Harvey, an economist and business professor at Duke University. Wall Street’s panicked opening, he added, “is bare-faced evidence of a market overreaction.”

Paul Wiseman and David McHugh of The Associated Press shed light on what’s actually going on in China and what that could mean for everyone else:

China is exporting something new to the world economy: Fear.

Global investors are quaking over the prospect of a devastating slump in the world’s second-biggest economy. And they’re fast losing confidence that China’s policymakers, seemingly so sure-footed in the past, know how to solve the problem.

The worst-case scenario is that a collapsing Chinese economy would derail others around the world – from emerging markets in Chile and Indonesia to industrial powers such the United States, the European Union and Japan.

The free-fall in the stock markets, in the words of David Kelly, chief global strategist at JP Morgan Funds, is “Made in China.”

This year, the International Monetary Fund expects China’s economy to grow 6.8 percent, which would be its weakest peace since 1990.

China, which was posting double-digit growth in the mid-2000s, is trying to engineer a daunting transition – from overheated growth fueled by exports and often-wasteful investment to slower growth built on consumer spending.

Official numbers show the Chinese economy grew 7 percent from January through March from a year earlier. Yet there’s growing suspicion that Beijing’s statistics are failing to capture the extent of the slowdown: Auto sales, electricity consumption and construction activity are “all looking very weak,” Kelly notes.

“Everybody felt they could slow down to about 7 percent (annual growth) and that wouldn’t be the end of the world,” says Sung Won Sohn, economist at California State University Channel Islands. “It looks like it’s slowing down even beyond that.”

Corrie Driebusch of The Wall Street Journal described how the American markets reacted to the day’s events:

Those jitters were in full display Monday. The Dow’s early drop was a bigger decline than the “flash crash” five years ago. About 6.6 billion shares traded on the New York Stock Exchange, nearly twice the daily average and the highest total in nearly four years.

A cascade of automatic selling by individual investors contributed to the initial selloff, some traders said. The sharp declines triggered stop-loss orders, which are designed to protect investors by triggering a sale once a stock falls to a certain level.

The selloff overwhelmed some online brokerage firms as investors tried to access trading accounts amid a plunge in the markets. Clients at TD Ameritrade Holding Corp. and Scottrade Inc. reported problems logging on to their accounts and executing trades. Scottrade experienced a 230% spike in trading volume on Monday morning, a spokeswoman said.

Jan Rothbauer and her husband, Bill, of Poland, Ohio, decided Friday—when the market was down about 300 points—to tell their financial adviser to sell most of their stock. The couple cut their stockholdings from about 50% to less than 5%, fearing they would suffer steeper losses as they prepared to retire.

“I felt this was on a roll now and not going to stop for a while, so it’s just time to move,” Ms. Rothbauer said.

Traders said some of the initial sell orders were from big investors looking for ways to protect themselves against losses outside the U.S. Markets in the U.S. are more liquid, and traders said investors took out bearish bets on U.S. stocks to offset possible losses in other countries where trading is often more difficult.

“It’s not necessarily a reflection of U.S. investors wanting to take money out of U.S. positions,” said Jeffrey Yu, head of single-stock derivatives trading at UBS Group AG.

The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.

“We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.

It wasn’t enough to reverse the slide. The Dow closed down 3.6%, at 15871.35. The S&P 500 dropped 77.68 points, or 3.9%, to 1893.21, leaving it in correction territory, a drop of 10% or more from a recent high, which it hit in May. The Nasdaq Composite Index declined 179.79 points, or 3.8%, to 4526.25. The S&P 500 and Nasdaq Composite have fallen 8% and 4.4%, respectively, in 2015. J.P. Morgan’s shares ended the day down 5.3%, at $60.25.

In a day full of chaos, one thing that stuck out was an email Apple CEO Tim Cook sent CNBC and TheStreet’s Jim Cramer, reassuring him that the company’s outlook in China is still bright. The New York Times’ Brian Chen had the story:

Last week, Jim Cramer, the boisterous host of CNBC’s “Mad Money,” had a company called Skyworks Solutions on his show. The company, a chip supplier for Apple, said its sales were strong in China, but its stock plummeted afterward anyway, following the global markets into the red.

And that gave Mr. Cramer an idea: What would Timothy D. Cook, Apple’s chief executive, say about iPhone sales in China, a crucial component to Apple’s future growth?

He sent the question to Mr. Cook by email Sunday evening. His letter read: “Dear Tim, Just trying to do my best to cover Apple, as always, and I keep running up against ‘China fears’ and ‘China worries.’ We are in a tough moment in the market, and any clarity I might be able to get before Squawk on the Street at 9 Eastern would really help.”

Mr. Cook, who is known for being an early riser, sent his reply around 8 a.m. on Monday — 5 a.m. in California, where he lives.

“I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August,” Mr. Cook said in the email to Mr. Cramer. “Obviously I can’t predict the future, but our performance so far this quarter is reassuring.”

The email gave Apple a short-term reprieve, helping lift its stock from 10 percent down to positive territory. Apple ended the day down 2.5 percent. The email also spoke to the amount pressure that companies — even blue-chip brands like Apple — face in the recent market turmoil.

Jan Dawson, an independent technology analyst for Jackdaw Research, said Apple’s stock had taken a beating largely because of growing concerns about China. A simple solution was to send signals of positive performance in China to Mr. Cramer, he said.

“I’m sure Cook was well aware that Cramer would share it with his viewers and it would therefore quickly become public,” Mr. Dawson said. “Apple stock has certainly risen sharply since the email was made public, so it’s arguable that it worked.”

While the future of China is still uncertain, with the Shanghai Composite Index opening down 6.4% Tuesday morning, one thing is certain — media outlets are running out of photos of traders looking stressed.