The Dow went down more than 300 points and put the blue-chip stock gauge on a collision course with a 10% correction.



Photo: Spencer Platt, Getty Images)

The financial turbulence that began in emerging markets and engulfed Wall Street intensified Monday, leaving U.S. stock investors bracing for the possibility of the first 10% market drop since 2011.

The New Year stock slide worsened with the Dow Jones industrial average plunging 326 points, or 2.1%, to 15,373. It was the Dow's worst point drop in more than seven months and extended its 2014 slide to 7.3%.

"There's this jittery feel about the market," says Thorne Perkin, president of Papamarkou Wellner Asset Management. "To say it is overdue for a (10% correction) may be the understatement of the year."

Monday's drop, following a weak January reading on U.S. manufacturing, came just as investors question whether the expected rebound in economic growth this year would materialize.

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The negative news, which some economists blamed on the severe winter weather, further worried investors who are already grappling with an economic slowdown in China, upheaval in the currencies of emerging markets, and the start of the Federal Reserve's move to taper its market-friendly bond-buying program.

"The market wanted a strong manufacturing number so it could look past QE tapering and the nascent currency contagion but they didn't get it," says Doug Cote, chief market strategist at ING U.S. Investment Management.

It was new Fed chair Janet Yellen's first day on the job and Wall Street was debating how the central bank would react to the recent market downdraft.

The weak start to 2014 has resulted in a paper loss of $1.2 trillion for the broad stock market, says Wilshire Associates. It also left the Standard & Poor's 500 index down nearly 6% from its recent high. The S&P 500 hasn't suffered an official correction — a drop of 10% or more — since a 19.4% slide that ended Oct. 3, 2011.

The rough start to 2014 has Wall Street handicapping how bad the carnage will get.

Barry Bannister, managing director at investment firm Stifel, predicts a further drop of 2% and a total decline of 8%. He says after the market's heady 30% gain last year, it was in grave danger of suffering a decline, especially given that the Fed is winding down its quantitative easing program.

Still corporate earnings are coming in solid, the U.S. economy is still on track to rebound and stock valuations have dropped below their long-term average due to the selloff, which provides support for the market, Bannister adds.

But bears such as Michael Pento, president and founder of Pento Portfolio Strategies, think the market could drop as much as 20%.

Last year's big move in stocks was way overdone and artificially inflated by Fed stimulus, he says. The stock market shouldn't have gone up 30% when corporate earnings only grew 6% and economic growth, or GDP, was roughly 2%.

"Now that the Fed game is over, you will see the real economy revealed, and it is very weak," Pento warns, adding that the global nature of the economy also threatens the U.S. outlook. "The U.S. is not an island. If Japan and China are slowing down and emerging markets (are struggling), who will we export to."

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