NEW YORK – Worries about an economic slowdown in China fueled a steep drop in commodity prices Monday, spooking investors and giving the Dow Jones industrial average its worst day of the year.
The trigger for the sell-off came from China, where the world’s second-largest economy expanded 7.7 percent in the first three months of the year, well below forecasts of 8 percent or better. That news pummeled copper, oil and other commodities. Shares of oil and mining companies fared the worst because China is a huge importer of their products.
The decline came after a pile of negative economic reports. In addition to the concerns about China, a separate report showed weak manufacturing in the Northeast, and a homebuilders’ survey indicated housing activity isn’t going to be strong either, said Steven Ricchiuto, chief economist for Mizuho Securities.
“People are realizing that the global economy isn’t as strong as they expected it to be,” he said.
The pullback disrupted, at least for the moment, the phenomenal rally that has sent the Dow up 13 percent and the Standard & Poor’s 500 index up 11 percent in 2013. Both indexes marked record highs only last Wednesday. But the market’s exceptional performance has fueled widespread speculation about a retreat.
Concerns that Cyprus and other troubled European countries may sell gold to raise cash have also weighed on prices for precious metals, said Dan Greenhaus, chief global strategist at the brokerage BTIG.
The Dow tumbled 265.86 points to close at 14,599.20, a drop of 1.8 percent. Caterpillar, a maker of heavy equipment used by miners, led the index lower, falling 3 percent to $82.27. The S&P 500 index slumped 36.49 points to 1,552.36, a loss of 2.3 percent.
The S&P was led by Freeport-McMoRan Copper & Gold, which fell 8 percent to $29.27. Analysts at Citigroup placed a “sell” rating on the mining giant on the expectation that copper prices will continue sliding.
The Nasdaq composite fell 78.46 points, or 2.4 percent, to 3,216.49.
It was the biggest drop for the stock market since Nov. 7 – Election Day – last year.
Of the 10 industry groups in the S&P 500, materials and energy stocks fared the worst, losing 4 percent. Indexes of small companies and transportation stocks, which are more vulnerable to swings in the economy, also fell 4 percent.
Crude oil prices hit their lowest level since mid-December, sliding $2.58 to finish at $88.71 in New York trading. And gold dropped $140, plunging below $1,400 an ounce for the first time in two years as a sell-off in metals continued from last week. Gold has now slumped $203 an ounce over the past two days.
In the market for U.S. government bonds, which traders often buy when they’re concerned about the economy, the yield on the 10-year Treasury note retreated to 1.69 percent, its lowest level of the year. That’s down from 1.72 percent late Friday.
But for all the alarm among investors, experts doubt that the drop in stock prices is a harbinger of another global recession. Deep government budget cuts have slowed the U.S. economy and kept Europe in recession. And China’s economy is cooling. But economists still expect the U.S. economy – the world’s biggest – to gain strength during the second half of the year.
“There’s so much money being pumped into the system, and the money has to go somewhere,” University of North Carolina finance professor Cetin Ciner said, referring to the more than $2 trillion in bonds the Federal Reserve has bought since the Great Recession.
And there’s ample evidence that the U.S. economy is making substantial improvements.
“There is some growth. Profits are up. So I don’t think commodities will affect stocks,” Ciner said. “There may be some volatility, but I think stocks will continue to go up in the short term.”