U.S. stocks surge as global markets stabilize

The storm that tore through global stock markets for several days appeared to have abated Wednesday.

The U.S. stock markets surged late in the day, with the Dow Jones industrial average jumping more than 600 points after a late afternoon rally.

Investors seemed to react to suggestions from a Federal Reserve official that policymakers may not raise interest rates soon.

“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” William C. Dudley, the president of the Federal Reserve Bank of New York, said Wednesday, referring to the Federal Open Market Committee, the Fed panel that steers monetary policy. Dudley is a member of the committee.

The Standard & Poor’s 500 index, a broad measure of the U.S. market, was up about 3.9 percent. The much-narrower Dow Jones industrial average gained almost 4 percent, while the tech-heavy Nasdaq gained more than 4 percent.

With investors still confused and concerned about China’s economy, the second-largest in the world after the United States’, the apparent lull may not last. And a resurgence of selling could heighten fears that volatility in financial markets will damp economic recoveries that have started in Europe and gained steam in the United States.

More often than not, though, stock market slides do little collateral damage.

“The stock market has to move a lot - and stay there - to have implications for the U.S. economy,” Dudley said. “What we’re seeing is not a U.S. problem. This is very different from the financial crisis.”

The debate over the consequences of the stock market slump will only intensify as central bankers meet in the coming weeks to decide whether to adjust monetary policy, one of the main drivers of economic activity. Until the current mayhem in the markets, many investors were betting that the Fed would raise interest rates in September.

Stock market corrections - the Wall Street term for a decline of at least 10 percent - come and go, usually with little consequence. And, importantly, they need not signal tough economic times ahead.

“Corrections are generally three times as frequent as recessions,” David Bianco, a strategist at Deutsche Bank in New York, said in an email, referring to the period since 1960. “This time I think the cause isn’t about U.S. recession risk.”

Investors sold the 10-year Treasury note, a safe-haven investment in volatile times. Its yield, which moves in the opposite direction from its price, rose to 2.19 percent, from 2.08 percent on Tuesday.

The recent wave of selling was set off in part by China’s surprise devaluation of its currency, the renminbi, on Aug. 11.

On Wednesday, shares in Shanghai swung between sharp gains and losses, before ending the day down 1.3 percent, and they showed no sign that China’s cut in interest rates late Tuesday would lead to a broader rally.

Officials in Beijing took new steps Wednesday to bring the stock market to heel, saying they were investigating executives from China’s biggest brokerage firm and had arrested staff members from the country’s stock regulatory agency.

Around Asia, other markets were mixed Wednesday. Stocks in Japan rebounded 3.2 percent, ending a six-day losing streak.

European stocks, which were up sharply Tuesday, began trading Wednesday with declines of 1 percent to 2 percent. They made up that ground, then lost it again, with the Euro Stoxx 50-stock index falling 1.5 percent. It was hard to tell how much of that activity might simply be a function of market volatility or an effect of the downward lead of U.S. markets Tuesday, and how much might reflect actual concerns about some European companies’ dependence on China.

In the coming weeks, economists will pore over data to assess whether the tumult in financial markets is weighing on investment decisions and consumer spending. The sell-off has wiped more than $1 trillion of value from the S&P 500, depleting households’ nest eggs and perhaps delaying some spending. And the weakness in stock markets could be a drag on corporations. The recent wave of mergers and acquisitions, for instance, may lose some steam.

Still, steep stock market declines often have little long-term effect on the wider economy. The last time the stock market declined more than 10 percent was in 2011. But the U.S. economy has mostly grown steadily since then. Instead, stock market corrections can be relatively isolated events that are driven more by stock valuations than fears about the economy.

Bianco noted that the profits of companies in the S&P 500 had been flat for two quarters and were likely to remain sluggish for a while. “I believe that is the cause of the correction,” he said.

China remains a big question mark. Deeper economic woes in China would have a global impact - on U.S. companies like General Motors and Yum Brands, which count China’s rising middle class among their biggest customers; on Australian iron ore exporters and Peruvian copper miners; and on Japanese industrial robot manufacturers and French luxury goods retailers.

Since China’s stock market started plunging in June, after a rally that more than doubled share values in a year, the country’s leaders have been scrambling to prop up the markets. But shares in Shanghai and Shenzhen have continued to plunge. Officials now appear to be tacitly acknowledging the failure of their attempts to rescue shares.

Li Kui-Wai, an associate professor of economics and finance at the City University of Hong Kong, said such measures amounted to “financial socialism.”

”Basically they just try to bail out everything,” Li said Wednesday. “The market is unsure about what China can do or will do, other than interfering in it,” he added, referring to the state measures.

This story was originally published August 26, 2015 at 7:58 AM with the headline "U.S. stocks surge as global markets stabilize."