U.S. stock market gains evaporate on another wild trading day

August 27
3:48 AM 2015

Another wild day of trading gripped Wall Street Tuesday. Many were hoping stocks would recoup losses from Monday's massive selloff, as all three major equity indexes surged during early sessions. But, as trading drew to a close, their gains vanished.

The Dow Jones Industrial Average and the S&P 500 closed about 1.3% lower, while the Nasdaq Composite was down 0.44%. Over the past six days of market turmoil, US stocks have lost $2.1 trillion in value. "People used the bounce to lower their exposure to equities. There is still a lot of concern out there," portfolio manager Ed Cowart told the Wall Street Journal.

The rally early in the day came after China's central bank, the People's Bank of China, announced rate cuts to flood the economy with cash. The cuts in interest rates take effect Wednesday, while a half-percentage-point reduction in banks' reserve requirements, on September 6.

Such move though was not enough to allay fears China's economy could be slowing faster than expected. Some believe the economy will get worse before it gets better. "We're not upgrading our view at this point until we see topline growth... until then it's going to be hard to sustain a rally," Nick Raich, CEO of The Earnings Scout, told CNBC.

China's rate cuts followed the country's worst stock market decline in decades. The Shanghai Composite Index dropped 7.6% Tuesday. The day before that it plummeted 8.5%. Over the past four sessions, the market has lost more than $1 trillion in value, a reflection of how investors are reacting to China's devaluation of its currency, the yuan, earlier this month. The devaluation surprised many, leading to a selloff of the yuan on expectations it would go lower.

The pain sparked by the currency devaluation is felt in other markets. Volatility remains high, with indicators suggesting more turbulence ahead. In the United States, the CBOE Volatility Index traded on Tuesday at 37. On Monday, it was at 50, its highest level since February 2009. It was consistent with CNNMoney's Fear & Greed Index, which flashed "extreme fear."

Apart from China, another cause for worry are collapsing commodity prices. But on Tuesday, crude oil and copper posted modest rebounds. Partly because of that, markets in Europe rallied, with Germany's DAX index gaining 5%, France's CAC-40, 4.1%, and the UK's FTSE 100, 3.1%.

The market movements intensify concerns China's troubles may spill over into other economies. This month, factory activity in the world's No. 2 economy dropped to a 77-month low. This is particularly bad for emerging markets dependent upon China's huge demand for raw materials.

For now, there is no indication the US economy would tank as a result of China's slowdown. That's because consumer confidence is up, and the job market, the housing industry, and the US dollar are all holding steady.

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