Fear drove Wall Street to one of its most dramatic, nauseating days in years.

Investors fled stocks and poured into bonds as worries about a global economic slowdown intensified. The Dow Jones industrial average dropped 460 points in the afternoon trading yesterday, all three US stock indexes were in negative territory for the year, and the so-called fear index spiked.

A late recovery limited the damage and left stocks mostly lower. But investors were shaken after the heaviest day of trading in more than three years.

“I think it’s fair to call it a global growth scare right now,” said Bill Stone, chief investment strategist at PNC Asset Management.

Economic slowdown

Investor concerns of a worldwide economic slowdown turned into outright fear after weeks of turbulence. Germany, Europe’s biggest economy, is struggling. Greece, a key actor in Europe’s debt crisis, could see its government collapse next year, putting a crucial bailout programme in danger.

A batch of worrisome economic news in the US also fuelled the selling. Traders sold riskier investments and moved money into US government bonds, gold and cash.

By the end of the day, the Dow Jones industrial average lost 173.45 points or 1 per cent to 16,141.74. The Standard & Poor’s 500 index fell 15.21 points or 0.8 per cent to 1,862.49 and the Nasdaq composite dropped 11.85 points or 0.3 per cent to 4,215.32.

Bond yields plunge

Yield on the benchmark US 10-year note fell from 2.2 per cent to below 1.91 per cent, a drop of 29 basis points. By the end of the day, it pulled back to a yield of 2.14 per cent.

The yield on bonds moves in the opposite direction of prices.

“It typically takes weeks for 10-year Treasury to move 29 basis points,” or 0.29 percentage points, noted Tom Di Galoma, head of fixed income rates in New York at ED&F Man Capital. “Today it moved 29 basis points in 5 minutes.”

Stone said he thought the plunge in bond yields likely played a role in the stock market’s steep drop in early trading. “I don’t care who you are: to see the 10-year near 2 per cent is shocking,” he said.

Investors have grown nervous of a stock market that had pushed ever higher, even in the face of a weakening global economy. The US market has also not had a correction, a technical term for when a stock or index falls 10 per cent or more, in more than 3 years. Historically a correction happens every 18 months.

Yesterday’s slide brings the market closer to that long-predicted but elusive point.

Michael Binger, senior portfolio manager at Gradient Investments, said that investors may have started to step back into the market in the last hour of trading as the S&P 500 approached a drop of close to 10 per cent from its record close of September 18.

US economy in recovery mode

The US economy remains in recovery mode. US employers are hiring at the strongest pace in 15 years. The economy expanded at a 4.6 per cent annual rate in the April-June quarter and most economists forecast growth will be a healthy 3 per cent this year and next.

In overseas markets, traders also purged their investments on concerns Europe might relapse into a recession.

France’s CAC 40 index sank 3.6 per cent and Germany’s DAX lost 2.9 per cent. Britain’s FTSE 100 fell 2.8 per cent.

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