China is back at the top of investor concerns after dismal trade numbers stirred concerns about the health of its economy, walloping major stock market indexes.
The tech-heavy Nasdaq composite index suffered its worst decline in nearly two-and-a-half years, falling 3.1 per cent. The S&P 500, the benchmark for blue-chip U.S. stocks, slid back into negative territory for the year, losing 2.1 per cent.
China, once the greatest source of optimism for the global economy, has delivered several disappointing snapshots of its economy in recent months. Still, an unexpected drop in its imports and exports came as a shock to many observers.
"In the back of the market's mind is this idea that the slowdown in China is a reflection of deeper underlying problems that ultimately could spur either a credit crisis or a recession" in the country, said Sal Guatieri, senior economist at Bank of Montreal.
China reported on Thursday that its exports in March fell 6.6 per cent from last year while imports slid 11.3 per cent, missing expectations by a wide margin and adding to evidence that the world's second largest economy is struggling to reach its growth target of 7.5 per cent this year.
The evidence of a slowing Chinese economy comes at a particularly delicate time: U.S. companies are starting to rollout their first-quarter results amid slashed earnings estimates and high valuations.
Analysts expect corporate profits will be relatively flat compared to last year, marking a substantial slowdown from the start of the year, when Wall Street had forecast earnings growth of nearly 7 per cent for the quarter.
Yet the S&P 500 is still reflecting considerable optimism about the future. Its price-to-earnings ratio rose above 17.4 last week, its highest level in about four years and an indication that many investors are counting on brighter prospects ahead.
Bed Bath & Beyond Inc. highlighted what can happen when those high expectations are disappointed. The U.S. retailer fell 6.2 per cent after delivering a disappointing outlook for its fiscal first quarter.
But the market turbulence extended well beyond companies that delivered bad news.
Technology stocks and other high-fliers bore the brunt of the downturn, suggesting that investors have become wary of steep valuations. Facebook Inc. fell 5.2 per cent, Amazon.com Inc. fell 4.4 per cent and Tesla Motors Inc. fell 5.9 per cent.
In Canada, the S&P/TSX composite index fell to 14,308, down 127.58 points or 0.9 per cent.
Some market strategists think investors are rotating out of growth stocks with high earnings potential and into so-called value stocks that are cheaper. Companies such as McDonald's Corp., AT&T Inc. and Colgate-Palmolive Co. rose on Thursday.
Growth stocks looked special when the U.S. economy was plodding along, but they appear relatively less interesting now that economic activity is picking up and rewarding more companies.
Indeed, Thursday brought more good news on the economy: The number of unemployed Americans filing for benefits last week fell to its lowest level in nearly seven years.
"We expect the strong momentum in recent labour market indicators will be maintained going forward with job gains remaining consistent with above-trend growth in the U.S. economy," said Josh Nye, an economist at Royal Bank of Canada, in a note.
The report on jobless claims arrived a day after the minutes from the last Federal Reserve policy meeting suggested the U.S. central bank is in no rush to raise interest rates.
Last week, the U.S. Labor Department reported that employers added 192,000 jobs in March, a healthy number that eased worries about disappointing economic data earlier in the year. The previous numbers now seem to have been largely the result of an unusually cold winter.
Some observers believe that concerns about China will also fade. Mr. Guatieri, for example, thinks that its economy will stabilize at growth above 7 per cent this year, driven by rapid urbanization and strong exports.
Others noted that China's trade data are now calculated differently than they were last year, implying that the decline in exports in March might not be as bad as initially feared.
As David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, put it: "Base effects from a year ago are distorted just enough to make comparisons very tricky."