Fear is back in the market.
Investors are worried about slower economic growth in China, a gloomier outlook for U.S. corporate profits and an end to easy money policies in the United States and Europe. They're also fretting over country-specific troubles around the world — from economic mismanagement in Argentina to political instability in Turkey.
Those fears converged to start a two-day rout in global markets this week, capped by a 318-point drop in the Dow Jones industrial average Friday. It was the blue-chip index's worst day since last June. The Dow plunged almost 500 points over the two-day stretch.
The Standard & Poor's 500 index fell 38 points, or 2.1 percent, to 1,790 Friday. The Nasdaq composite fell 90 points, or 2.2 percent, to 4,128.
Despite the sell-off, U.S. stocks remain near all-time highs after surging 30 percent last year. The S&P 500 is 3 percent below its record high of 1,848 on Jan. 15
U.S. stocks have not endured a correction — a drop of 10 percent or more over time — since October 2011.
In Asia Friday, Japan's Nikkei 225 slipped 1.9 percent to close at 15,391.56; Hong Kong's Hang Seng shed 1.2 percent to 22,450.06; and Seoul's Kospi dropped 0.4 percent to 1,940.56.
The turbulence coincides with a global economic shift: China and other emerging market economies appear to be running into trouble just as the developed economies of the United States and Europe finally show signs of renewed strength nearly five years after the end of the Great Recession.
The trouble began Thursday after a January survey showed a drop in Chinese manufacturing activity. Days earlier, China reported that its economic growth last year matched 2012 for the slowest pace since 1999.
"It is interesting how even a mild tremor in China's growth causes such anxiety around the world," said Eswar Prasad, professor of trade policy at Cornell University.
Slower growth in China is bad news for countries that supply oil, iron ore and other raw materials to the world's second-biggest economy. Some of those countries, such as Indonesia and South Africa, were already struggling with an outflow of capital as rising U.S. interest rates drew investors to the United States.
Here's a look at the forces buffeting global financial markets:
The end of easy money
Since the global financial crisis hit in 2008, the Federal Reserve has flooded markets with cash to push interest rates lower and encourage U.S. businesses and consumers to borrow and spend. But last month, as signs of growing economic strength emerged in the U.S., the Fed cut back — reducing its monthly bond purchases to $75 billion from $85 billion. It also said that it expected to reduce the bond-buying further "in measured steps" at upcoming meetings.
The Fed meets again next Tuesday and Wednesday. Many economists expect the central bank to cut the purchases again — perhaps to $65 billion a month.
The scaling back of the Fed's easy money policies has hit some emerging markets hard. When the Fed was pushing U.S. rates lower, emerging markets had seen an inflow of capital from investors seeking higher returns than they could get in the United States. Now investment is flowing back to America, hammering currencies in emerging markets.
The South African rand, Russian ruble, Turkish lira, and especially the Argentinian peso — which fell 13 percent Thursday — have been "trounced," said Jane Foley, a currency strategist at Rabobank. "Talk that the U.S. Federal Reserve will announce another reduction in its monthly bond purchases next week ... (is also) contributing to a loss of confidence in some emerging markets," she said.
In some countries, concerns over the local political or financial situation have worsened the market volatility dramatically. That was most obvious in Argentina, where the peso this week suffered its sharpest fall since the country's 2002 economic collapse. The government, running short of reserves it could use to buy the currency and keep it from falling, has let the peso drop instead. The country's economic fundamentals are grim: Inflation is believed to be running at about 25 percent to 30 percent.
The peso fell 16 percent in two days, easily the worst performer among emerging markets.
Turkey's national currency, the lira, hit multiple record lows in recent weeks as investors worried about the fallout of a corruption scandal that threatens to destabilize the government. Having a stable government for the past 10 years has been one of the key ingredients in the country's economic revival.
The lira hit an all-time low of 2.33 against the dollar on Friday — from around 2 per dollar in December — despite a $3 billion-intervention by the central bank in foreign exchange markets.
Beyond political problems, the countries that have seen their currencies fall most are those that rely heavily on exports of raw materials used in manufacturing. The Russian ruble was trading at 34.58 per dollar, from below 34 on Thursday. The South African rand weakened to 11.13 per dollar, from 10.98 the day before.
China and global growth
Since the recession, the global economy has relied heavily on China and other emerging markets as the developed economies of the United States, Europe and Japan struggled.
But China's economy is decelerating. It grew 7.7 percent in October-December 2013 from a year earlier, down from the previous quarter's 7.8 percent growth. Factory output, exports and investment all weakened. On Thursday, the preliminary version of HSBC's purchasing managers' index of Chinese manufacturing fell to 49.6, the lowest reading since July's 47.7. Anything below 50 signals a contraction.
China's growth is still is far stronger than the United States, Japan or Europe, but is down from the double-digit rates of the previous decade.
Many economists are troubled less by the slower growth numbers than by China's over-reliance on trade and investment instead of spending by its consumers.
"China, and the world at large, would benefit from its shift to a lower but more sustainable pattern of growth that is not so heavily dependent on investment-led growth fueled by bank credit," Cornell's Prasad said.
China's growth is slowing just as the world's rich economies begin to gain momentum.
The 17 countries that use the euro currency appear to be recovering from a debt crisis that tipped them into a double-dip recession in late 2011.
In the United States, households have reduced crippling debt levels and are in better shape to start spending again. The International Monetary Fund expects the U.S. economy to grow 2.8 percent this year, up from 1.9 percent in 2013, and for the eurozone economy to grow 1 percent in 2014 after contracting 0.4 percent in 2013 and 0.7 percent in 2012.
Adolfo Laurenti, an economist at Mesirow Financial, expects the United States, Britain, Germany and Japan to drive global economic growth this year.
The "emerging economies that contributed most to global growth during the years following the Great Recession are expected to take a backseat," he said in a research note.
It's early yet in earnings season. Only 123 companies in the Standard & Poor's 500 index have reported so far. Another 130 report next week.
So far, it's been a decent season, at least on the surface.
About two-thirds of S&P 500 companies that have reported earnings for the last quarter have beaten analysts' estimates, according to S&P Capital IQ. That is in line with the historical average.
Still, expectations have been falling. As recently as this summer, analysts predicted earnings growth of more than 11 percent for the quarter that companies are reporting now. That prediction has been nearly halved to 5.9 percent.
And forecasts may fall further. Seven of 10 companies that have talked about likely results for the current quarter have cut their projections, more than average, according to FactSet. Their stocks have tanked. Since United Continental lowered revenue estimates on Thursday, its stock fell 6 percent.
U.S.-based multinational companies had some of the biggest declines on Friday, as investors were reminded of how much those companies rely on overseas sales.
General Mills and Oracle have noted that the strong dollar has hurt their finances. That's because they sell goods overseas in the local currency, so the sale looks smaller once it's translated into dollars. General Mills also said last month that Venezuela's currency devaluation would probably cut its earnings per share to the low end of its guidance.
3M is another example, with almost two-thirds of its revenue coming from outside the U.S. Known for its Scotch tape and Post-it notes, it has much larger businesses making industrial adhesives, ceramics, safety gear, and even roofing shingles. Its shares were down 3 percent on Friday, even though analysts are predicting profit and revenue growth when it reports results.
3M's fastest revenue growth has been outside of the U.S.
On Tuesday, Europe-based consumer goods giant Unilever said fourth-quarter sales slowed because of weakness in emerging markets. The decline was mostly because of unfavorable currency moves.
"So when emerging markets sniffle, large cap companies can catch a cold," said Lawrence Creatura, a portfolio manager with Federated Investors.
AP Writers Bernard Condon in New York, Toby Sterling in Amsterdam and Suzan Fraser in Ankara, Turkey, contributed to this story.