So much for the lazy late summer.

Traders had to take cover against a market swoon that clobbered stocks around the world last week. Intensifying anxiety about slowing economic growth, particularly in China, sent stocks down a painful 6% on the week. It culminated in a nasty blowoff Friday, when the Dow Jones Industrial Average fell more than 500 points.

Energy equities were most punished, down 8.7%. Investors fled to “havens” like utilities and telecom stocks, down only 1% to 3%, and U.S. Treasury bonds. The yield on the 10-year note fell to 2.05% from 2.19%. (Bond prices move inversely to yields.)

Following the devaluation of the Chinese yuan, and a poor China data point released Friday, “…investors have come to the realization that global growth in the second half isn’t going to reaccelerate as previously hoped,” says Margaret Patel, a portfolio manager with Wells Fargo Asset Management.

Energy prices haven’t stabilized either, again contrary to expectation. Crude oil fell 5% last week to $40.24 per barrel. “Stocks have been priced for growth, and if that doesn’t happen, it takes the air out of the market,” she says.

For years, the emerging markets were where U.S. multinationals, especially companies in the Dow, have been making investments for growth, says Paul Karos, a money manager with Whitebox Advisors. Now there’s fear of an emerging-markets recession, he adds.

Last week, the Dow plunged 5.8%, or 1018 points, to 16,459.75, while the Standard & Poor’s 500 index shed 121 to 1970.89. For both, it was the biggest weekly point decline since October 2008. The Nasdaq Composite fell 6.8%, or 342, to 4706.04. World stocks dropped 6%. Markit said Friday that the August preliminary Caixin/Markit China Manufacturing Purchasing Managers’ Index, a measure of national manufacturing, fell to 47.1 from July’s 47.8, to the lowest level in over six years. Below 50 is seen as a sign of contraction.

On a relative basis, the U.S. looks like an oasis of growth, but can it hold up if other economies recede? American domestic data will be key for U.S. stocks in the next few months, Karos says. “We still see slow but positive U.S. growth,” he says. A few weeks ago, most investors thought the Federal Reserve would raise interest rates in September. Now, not so much.

(Source: Barrons Online)