The stock market took investors on a turbulent ride for a second straight day Tuesday, soaring on news of an interest rate cut in China, only to plunge in the final hour and close with another steep loss.
The Dow Jones industrial average shed an additional 204.91 points by the end of the session, to close at 15,666.44 — a decline of 1.3 percent for the day, nearly 11 percent in a week. The day’s healthy gains evaporated in the dramatic end of trading, as nervous sellers drove the benchmark index down 510 points in the final hour.
Stock prices had tread water for much of this year, until China surprised the world by devaluing its currency earlier this month. Since then, stock markets have experienced much bigger price swings, including the 1,000-point Dow plunge at the opening of trading on Monday.
“We’re likely to be in a volatile period for a while,’’ said Robert McConnaughey, global head of research for Columbia Threadneedle Investments in Boston. While warning investors against overreacting to daily moves of the market, with the big swings in recent days, he said, “It’s hard not to put you on the edge of your seat.”
Shares were mostly lower in Asia to start Wednesday, with Chinese, Hong Kong, and Japan shares swinging in and out of negative territory.
Tuesday began on a positive note, after China cut interest rates for the fifth time in nine months, hoping to stabilize its own plunging stock market and bolster its economy. Markets across Europe had already rebounded on that news before US stocks started the day moving sharply higher. Other assets that had taken a beating in markets Monday, including oil, also rallied.
The Dow average jumped 440 points, and the vast majority of the market's stocks gained ground. That didn’t last. But there was no particular news or event that traders could point to as a cause for the reversal.
The broader Standard & Poor’s 500 index fell 1.35 percent for the day, and the Nasdaq index, packed with many tech firms, fell 0.44 percent.
China’s economy, the second largest in the world, has been a leading force pulling the world out of the Great Recession. Now investors are worried that engine is slowing and that global growth could stall.
“The basic challenge is that an awful lot of capacity has been built up in the world to service a level of Chinese demand that may not be there,’’ McConnaughey said.
Some economists believe stock market investors have gone overboard, underestimating the strength of China’s economy, the recovery in the United States, and some signs of improvement in Europe.
“The US stock markets have overreacted to events in China,’’ said Sara Johnson, senior research director for global economics at IHS Economics in Lexington. “The US economy is still in reasonably good shape. The housing market is rebounding and consumer spending is growing at a solid pace.”
Goldman Sachs & Co. sought to reassure investors Tuesday, writing in a research note that it still sees the risk of a US recession as “extremely low.” The American economy is still poised to grow at more than a 2 percent clip for the year, Goldman said.
But the Wall Street firm also said China’s recent currency devaluation and a global drop in oil prices were helping to roil the markets. Investors should expect more volatile stocks, Goldman said, and will need to “exercise patience.”
The sharp decline in late stock trading Tuesday was reminiscent of 2008, when stock markets often moved higher on news of the day but gave back all the gains in waves of fearful afternoon selling.
Analysts see such volatility as common when investors are struggling to gauge the strength and direction of the market.
“This is part of a bottoming process, you get these violent pullbacks,’’ said Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management. He acknowledged that investors were hardly given assurances that it was safe to go back in the water. “We did not send the all-clear signal to our clients this morning,’’ he said.
Investors also continued to question whether the Federal Reserve, which has kept short-term interest rates at near zero, would begin to raise rates later this year. Economists had expected Fed policy makers to begin raising rates in small increments as soon as next month.
Taken together with the China worries, said Erik Weisman, chief economist at MFS Investment Management in Boston, that means investors are wrangling with questions about the world’s two biggest economies.
The Fed raised interest rates after clear evidence of economic recoveries in 1994 and 2004. But “there was a greater sense that [it] was the right thing to do,” said Weisman. “Here, you just don’t feel that.”
That’s partly because the US economy has recovered from the recession at such a slow place. “There’s still a lot of healing to go,’’ Weisman said, “and the rest of the world hasn’t healed as much as us.”