By Wallace Witkowski and Polya Lesova, MarketWatch
SAN FRANCISCO (MarketWatch) -- U.S. stocks ended sharply lower
on Monday, following a 5.3% tumble in the Shanghai stock market
overnight spurred by worries over China's economy and banking
system.
However, stocks on Wall Street pared some of their losses in the
afternoon after Federal Reserve officials tried to downplay talk of
tapering the central bank's bond-buying program. Last week, the
S&P 500 fell 2.1% on concerns the Fed will start pulling back
monetary stimulus later this year if the economy improves further.
Read about seven ways to spot a market top.
After dropping 248 points during the session, the Dow Jones
Industrial Average (DJI) closed down 139.84 points, or 0.9%, at
14,659.56.
During the session, the index dropped as low as 14,551.27, and
rallied back to within spitting distance of going positive, hitting
a session high of 14,795.79.
Five of the Dow's 30 components closed higher.
Bank of America Corp. (BAC) was the biggest decliner on the Dow,
with shares down 3.1%, followed by Hewlett-Packard Co. (HPQ) with
shares down 3%.
Boeing Co. (BA) closed down 2.1% after one of its 787 Dreamliner
planes flown by United Airlines (UAL) had to make an emergency
landing Sunday due to a brake problem.
The S&P 500 index (SPX) finished down 19.34 points, or 1.2%,
at 1,573.09, with all of its 10 major sectors in negative terrain.
The index posted an intraday low of 1,560.33 and a session high of
1,588.77. Materials and financials posted the biggest losses.
The Nasdaq Composite index (RIXF) closed down 36.49 points, or
1.1%, at 3,320.76, following an intraday low of 3,294.95 and a
session high of 3,344.66.
Shares of Apple Inc.(AAPL) fell 2.7% to $402.54 after Jefferies
cut its price target to $405 from $420, saying the company may slow
iPhone production.
Decliners outnumbered advancers about 7 to 1 on the New York
Stock Exchange and 7 to 2 on the Nasdaq. Composite NYSE volume
topped 4.5 billion shares, while composite Nasdaq volume topped 1.9
billion shares by the close.
Stocks pared intraday losses after Fed officials started making
dovish comments Monday. Minneapolis Fed President Narayana
Kocherlakota said the market's reaction to Fed comments is not yet
a concern as long as higher bond yields do not harden over a long
period of time. Also, Dallas Fed President Richard Fisher said in a
Financial Times interview on Monday that central-bank members fully
understood there would be a significant market reaction to last
week's Fed meeting and that big money is organizing itself like
"feral hogs" to test the Fed.
New York Fed President William Dudley said the Fed has fallen
short of its inflation and employment objectives. Dudley said that
Fed policy, while aggressive by historical standards, is not
sufficiently accommodative. Read Dudley's full speech.
But, it's not all about the Fed. Monday's selloff is a
continuation of renewed concerns over global uncertainty in China,
Japan, and Brazil, said Dan Greenhaus, chief global strategist at
BTIG LLC.
"Right now, one has to think this has to be a buying
opportunity," Greenhaus said.
In the U.S. government-debt markets, the 10-year Treasury yield
(10_YEAR), which moves inversely to price, rose 2 basis points to
2.56%, after rising as high as 2.67% earlier in the session.
European stocks tumbled and Shanghai stocks melted down.
On Monday, the Shanghai Composite Index plunged 5.3% to
1,963.24, its first close below 2,000 since December. The
percentage drop was the worst since a 6.7% fall in August 2009.
In fact, Chinese stocks have already ventured into bear country,
noted Andrew Wilkinson, chief economic strategist at Miller Tabak
& Co., with levels about 20% off from highs hit in
February.
A cash crunch in China took a toll on bank stocks. Short-term
interbank interest rates in Shanghai were off last week's highs,
but still above 6% on Monday. China's central bank warned that
banks need to control liquidity better.
The moves in China are not out of character with what policy
makers there have been indicating lately, said Mark Luschini, chief
investment strategist at Janney Montgomery Scott.
"They are steps to moving toward a more market-based economy,
and squashing out shadow-banking activity, which is a potential
source of bad loans," Luschini said. With China and the Fed
weighing on U.S. stocks, Luschini sees a little more to go in the
correction, but doesn't expect the pullback to be in the 10% to 20%
range.
Goldman Sachs downgraded its GDP growth forecasts for China to
7.4% and 7.7% for 2013 and 2014, respectively, from 7.8% and 8.4%,
previously. Read commentary: China's alarming credit crunch
"The recent tightening of the interbank market has sent a strong
policy signal that the strong credit growth earlier in the year
will likely not continue," wrote Goldman economist Li Cui in a
note.
In corporate news, shares of Vanguard Health Systems Inc.
(VHS.XX) soared 67% after Tenet Healthcare Corp. (THC) agreed to
acquire the company for $1.63 billion, or $21 in cash per Vanguard
share, marking a 70% premium to Vanguard's Friday close. Shares of
Tenet Healthcare rose more than 4%.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires