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Drenched in red: Wall Street plunges in worst weekly retreat since 2011

Adam Samson

U.S. markets tumbled more than 5% this week as worries mounted over the state of the global economy.

The S&P 500 plummeted 64.8 points, or 3.2%, on Friday, capping a painful week that saw the broad-market barometer shed 5.8%. Meanwhile, the Dow Jones Industrial average dropped 530.9 points, or 3.1% on the day. It was the steepest drop since August 2011 for the blue-chip average. Meanwhile, the Nasdaq Composite dropped 171.5 points, or 3.5%. All three major benchmarks are now in the red for 2015, and the Dow narrowly entered correction territory.

The selloff wiped out some $1.3 trillion in U.S. market value since Tuesday morning, according to a calculation by Yahoo Finance using the Dow Jones U.S. Total Market Index. In a sign of the concern on the Street, the CBOE's VIX, which is sometimes called Wall Street's fear gauge, spiked more than 100% for the week.


"Investors have been provided with a relentless string of global data points that speak to a massive transition to 'risk-off,'" said Peter Kenny, chief market strategist at Clearpool Group.

Echoing Kenny, Gustavo Reis, an economist at Bank of America Merrill Lynch, wrote in a note to clients that emerging market "growth concerns and softer activity news in (developed markets) appear to have switched a full on global growth scare in the marketplace." He bluntly added, "We believe the global outlook has deteriorated."

U.S. traders were greeted Friday with a round of data indicating China's vast factory sector may have contracted at the swiftest pace in six-and-a-half years in August. This comes as the government there has taken unprecedented steps to prop up the world's second biggest economy. Indeed, last week, the People's Bank of China sharply depreciated the yuan, a move some observers said was aimed at boosting exports.

The yuan devaluation also ignited concerns that a new currency war could be afoot, in which several emerging-market countries could move to cut the value of their currencies to protect their own export markets. Those worries were amplified this week after Vietnam devalued the dong by 1%, and Kazakhstan's tenge crashed.

This could put the U.S. economy in a tough bind as the greenback has already surged more than 16% against a basket of global currencies over the past 12 months. The Federal Reserve is also seen hiking interest rates this year, which would likely put even greater pressure on the U.S. dollar.

In fact, Kenny noted that the selloff was exacerbated by "growing concerns of a misstep by the Federal Reserve in terms of normalization timeline."

Race to safety

Given the economic nature of the concerns, cyclical shares took the heaviest losses on the week, while defensive holdings were spared the worst of the selling. The energy, technology, and financial sectors fell by the widest margins, while the utilities, telecommunication and health-care sectors fell the least.

Among the many decliners was Apple (AAPL), the world's biggest publicly-traded company by market capitalization, which tumbled into bear-market territory on Friday.

Many commodities were also pummeled. The benchmark U.S. crude oil contract dropped more than 5% for the week, briefly dipping under $40 a barrel for the first time since 2009. Crude is off by almost 25% for the year.

Traders, meanwhile, raced into safe-haven assets. The yield on the benchmark U.S. 10-year Treasury bond fell 0.034 percentage point on Friday to 2.05%. Bond yields move in the opposite direction of prices, so when traders bid-up the asset, the yield falls. Gold jumped 4.2% to cap the week at $1,159 a troy ounce.

Looking ahead

Attention could shift back to the U.S. next week, as investors will receive a slew of key economic data. Among the reports on tap are a revised look at second-quarter gross domestic product, a closely-watched snapshot of home prices, and a gauge of consumer income and spending.

The Federal Reserve Bank of Kansas City also hosts its annual economic symposium in Jackson Hole, Wyoming. Fed chief Janet Yellen won't be in attendance, but her No. 2, Stanley Fischer, will be delivering an address on inflation. While the job market has picked up steam in recent months, most gauges of inflation remain stubbornly below the central bank's targets.