A worldwide market slump gains traction

Feeding the slump, which was even worse elsewhere around the world, are worries about slower economic growth in China, a gloomier outlook for U.S. corporate profits and country-specific troubles — from economic mismanagement in Argentina to political instability in Turkey.

At the core of the troubles are concerns about the U.S. Federal Reserve and European market regulators winding down policies that have kept interest rates at or near all-time lows.

Those programs stimulated economic growth in the wake of the Great Recession and helped push investors into riskier assets such as stocks and foreign projects. But as they end, investors appear to be returning to safer sources of income, such as U.S. government bonds — ”and some emerging markets are feeling the effects of that retreat, analysts said.

“€œThere was a lot of liquidity, that just kept the party going overseas,”€ said Karyn Cavanaugh, a market strategist with ING U.S. Investment Management. “€œNow that the word is out that the Fed is tapering — and indeed they are tapering — there are worries that the liquidity is going to dry up and that people are pulling their money back.”€

U.S. stocks have not endured a correction — a drop of 10 percent or more over time — since October 2011. While the stock price boom has repaired much of the damage the 2007 to 2009 downturn did to Americans’ retirement savings, the longer it has gone on, the more nervous big investors have grown.

The turbulence coincides with a global economic shift: China and other emerging-market economies appear to be running into trouble just as the developed economies of the United States and Europe finally show signs of renewed strength nearly five years after the end of the recession.

The spark for this week’s downturn was a January survey, released Thursday, that showed a drop in Chinese manufacturing activity. Days earlier, China reported that its economic growth last year had matched 2012 for the slowest pace since 1999.

“It is interesting how even a mild tremor in China’s growth causes such anxiety around the world,” said Eswar Prasad, professor of trade policy at Cornell University.

In Asia, Japan’s Nikkei 225 slipped 1.9 percent Friday to close at 15,391.56; Hong Kong’s Hang Seng shed 1.2 percent to 22,450.06; and Seoul’s Kospi dropped 0.4 percent to 1,940.56.

Slower growth in China is bad news for countries that supply oil, iron ore and other raw materials to the world’s second-biggest economy. Some of those countries, such as Indonesia and South Africa, were already struggling with an outflow of capital as rising U.S. interest rates drew investors to the United States.

In the U.S., the outlook for corporate profits has been weakening, and the turmoil in emerging-market currencies could make matters worse. Forecasts for income growth have been falling and could decline further.

Some companies are becoming more pessimistic — especially large, multinational firms with heavy foreign investments. For the January-March quarter, seven out of every 10 companies that have talked about their prospects have cut projections, more than average, according to FactSet. The stocks have tanked as a result.

As investment flows back the United States, the dollar is appreciating against foreign currencies, especially in emerging markets that have been hammered this week — making U.S. good less competitive there. The South African rand, Russian ruble, Turkish lira, and especially the Argentinian peso — which fell 13 percent Thursday — have been “trounced,” said Jane Foley, a currency strategist at Rabobank. “Talk that the U.S. Federal Reserve will announce another reduction in its monthly bond purchases next week … (is also) contributing to a loss of confidence in some emerging markets,” she said.

Franz Wenzel, chief strategist at Axa Investment Managers in Paris, said problems in emerging markets had helped to create “a bit of a fear factor. And if a general risk aversion starts to creep in, that affects every market.”

“I wouldn’t call it a panic,” Wenzel said, but investors “just aren’t used to seeing this kind of volatility.”