Stock Market Hits Biggest One-Day Drop Since 2008, Will It Continue?

The stock market just hit its worst week since 2011, leaving investors jittery for a weekend of uncertainty. The immediate cause of the sell-off was China, which is suffering from an economic slowdown. Still, many analysts see the U.S. market downturn as an overdue correction, which might continue into next week.

On Friday, the Dow Jones industrial dropped 530.94 points (3.1 percent) to 16,459.75, the S&P 500 went down 64.84 points (3.2 percent) closing at 1,970.89, and the Nasdaq slid 171.45 points (3.5 percent) to 4,706.04.

It was the worst one-day crash since 2008 according to the Los Angeles Times, and finished off the worst week since 2011. The oil industry was among the biggest losers as stocks dropped and oil prices briefly dipped below $40 a barrel — bad news for the America’s first tar sands mine.

China touched off the global selloff when it announced a surprise devaluation of its currency, the Yuan, by 4.4 percent. According to the AP, investors saw it as a sign that the economic slow-down in China was worse than reported, an idea that was reinforced by a laundry list of other bad economic news including slowing factory growth, steep declines in exports, and the country’s stock market crash in July.

On the U.S. side, some analysts argue the rout is a sign that the market is correcting itself after one of the longest bull runs in history — and it’s not over yet.

James W. Paulsen, chief investment strategist at Wells Capital Management, explained that Friday’s flash was long in the works.

“It came in a flash but what was behind it was building… Investors had grown complacent and complacency is never good.”

He added, “The question now: Is it over? My suspicion is no.”

The definition of a “correction” on Wall Street is a drop of 10 percent to adjust to valuations. The Dow Jones already hit that mark at the end of the week, but some fear it could go further as high stock valuations seem disconnected from stagnate corporate earnings.

USA Today laid out four scenarios for what percentage the stock market could drop — 37, 20, 9.1, or 0 — depending on how much (and if) investors re-evaluate the value of traded companies compared to their yearly and future expected earnings.

Despite all the doom and gloom, some see the sudden dip as a good sign.

New York Times’ writer Neil Irwin’s reaction was “it’s about time,” explaining that the decline lets out a little steam before the stock market gets into a bubble.

Naturally, no one knows what next week will be like in the stock market or the global economy, but investors might end up being a bit more cautious in the near future.

[Image Credit: Getty Images]