As Recovery Looks Weak, Stocks Take a Deep Dive

Signs of weakness in the American economy pushed Wall Street to its worst day in an already bad year.

The catalyst on Monday was the release of a survey of the manufacturing industry, which fell in January to its lowest level in eight months. Stocks slid, with the Standard & Poor's 500-stock index ending the day down 2.3 percent — its sharpest decline since June 20. The benchmark index is now off 5.8 percent from the record close it set on Jan. 15, and down to its lowest level since last October.

The discouraging manufacturing numbers — and similarly disappointing figures on car sales — were attributed to recent bad weather. But together they were enough to cause concern among investors that talk of a strengthening economic recovery may have been too optimistic.

"There's no question that some of the economic data we've seen recently just hasn't been as strong as hoped for," said Tim Ghriskey, the chief investment officer at the Solaris Group, an asset manager. "Perhaps expectations of economic improvement got ahead of themselves."

Spencer Platt/Getty Images Traders at the New York Stock Exchange Monday, when the S.&P. 500-stock index and the Dow were down more than 2 percent.

Markets around the world have been vulnerable to bouts of turmoil since the Federal Reserve started scaling back the bond-buying programs it has used to stimulate the United States economy, the world's largest. As the Fed starts to take its foot off the accelerator, questions about the strength of global growth have mounted.

In recent weeks, those questions have been largely focused on slowdowns in the emerging economies in Asia, Africa, Europe and Latin America, which have long relied on the low interest rates promoted by the Fed. Sell-offs in places like Turkey and Russia have caused concern that these countries could eventually be as a drag on the United States economy.

Stocks plunged 3 percent on Tuesday morning in Tokyo. But on Monday, it was the United States that helped lead the world down. Stock markets across Europe fell sharply almost as soon as the Institute for Supply Management's survey of the manufacturing sector was released at 10 a.m. The index fell to 51.3 from 56.5 in December. A number above 50 indicates growth, but most economists had expected much stronger expansion.

The most disappointing number in the survey came from the question asked about new orders, which is seen as a forward-looking indicator. That dropped to 51.2 from 64.4 last month.

General Motors, meanwhile, reported a 12 percent drop in sales in January, and Ford Motor said its sales fell 7 percent.

Many economists, though, were cautioning investors not to take the new data too seriously, given other recent signals pointing to continuing economic growth, and the many warnings about temporary weather-related issues in Monday's data.

The Institute for Supply Management said in its report that several businesses responding to the survey cited "adverse weather conditions as a factor negatively impacting their businesses in January, while others reflect optimism and increasing volumes in the early stages of 2014."

Investors, for their part, largely described the market's extreme reaction as a somewhat expected rebalancing after the big gains that American stocks experienced last year.

"There were a huge amount of profits not taken at year-end," said Ed Yardeni, an independent economic analyst. "Everybody was waiting patiently for the market to go down."

After the nearly 30 percent rise in the S.&P. 500 last year, many traders say they have been ready to sell at the first sign of a downturn. That has led to an unusually volatile stretch in the markets. The Dow Jones industrial average has risen or fallen at least 100 points on 11 days this year.

The Dow ended Monday down 2.1 percent, or 326.05 points, at 15,372.80. The Nasdaq composite index was 2.6 percent, or 106.92 points lower, at 3,996.96 — its first close below 4,000 since Dec. 12. The S.&P. 500 finished down 40.70 points at 1,741.89.

The move out of stocks has reversed what had been a growing shift away from the bond market. Now investors are once again seeking the safety of bonds, helping to push the yield on the benchmark 10-year Treasury note to 2.58 percent from 2.65 percent late Friday and down from around 3 percent since the beginning of the year. The yield is at its lowest point since late October. The price of the 10-year note, which moves in the opposite direction, rose 18/32, to 101 15/32.

Despite the relative complacency on many trading desks, strategists are now carefully watching for any new signs of a slowdown in the American economy. The most important indicator will come this Friday, when the monthly employment report is released. Last month, the number of new jobs created came in far below the level anticipated. That too was written off as a one-time anomaly, but together the recent data has economists questioning whether there is a more significant turn.

"As for market nerves, the latest batch of data does not bode well for Friday's employment report, which means investors may yet anticipate further volatility ahead of its release," Andrew Wilkinson, the chief market analyst at Interactive Brokers, wrote in a note to clients.

Still, many strategists are still expecting the recent signs of weakness to go away with the bad winter weather. "It certainly feels like there's nothing that has fundamentally changed to set off a bear market," Mr. Ghriskey of the Solaris Group said.

A version of this article appears in print on 02/04/2014, on page B1 of the NewYork edition with the headline: As Recovery Looks Weak, Stocks Take A Deep Dive .