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What's behind Wall Street's roller-coaster ride?

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Posted at 8:34 PM, Oct 15, 2014
and last updated 2014-10-15 22:42:36-04

Financial volatility returned with a vengeance Wednesday as U.S. stock prices plunged precipitously before recovering somewhat in a late rally. Absent most of the year, market anxiety returned across the financial spectrum and virtually no class of financial assets was spared.

At its low, the Dow Jones industrial average was off by 460 points in midday trading and the S&P 500-stock index fell nearly 3 percent as a rout that began in Europe spread across the U.S. financial markets. Investors sought haven in the 10-year Treasury bond, briefly driving its return to under 2 percent.

The trend reversed, and the Dow rallied to close down 173.45 points to 16,141.74. The S&P 500 finished 15.21 points in the red to 1862.49 and the Nasdaq shed 11.85 points to 4215.32.

Here are some answers to questions about what's whiplashing financial markets.

Q: U.S. economic growth is strong, hiring has picked up. Why the market fuss?

A: Investors look around the globe and they see export power Germany dialing back its 2015 growth projections to just 1.2 percent. Much of Europe is approaching recession and the largest actors in the European Union favor opposing actions — either more austerity or more stimulus. Add to that hints from China that it might not meet its own tepid growth projections, violent protests in Hong Kong and big emerging market Brazil in recession. It's not a pretty picture most anywhere.

Q: Doesn't the U.S. economy trump all that?

A: It is the world's most robust economy, but Wednesday brought weaker-than-expected retail numbers, with sales off 0.3 percent in September after a strong August. Additionally, a measure of inflation as felt by industry came in weaker than expected. These overshadowed the good news of the federal deficit falling to its lowest percentage of the broader economy since 2007.

Q: What about the Ebola virus. Has that had any effect?

A: Worries about Ebola contributed to the sell-off. Sectors that are potentially affected most by the spread of the deadly virus, such as airlines, are being punished. News that a second nurse in Dallas has the virus, and that the nurse had a fever when she flew last week from Cleveland to Dallas, helped cement investor fears that many people might soon scale back all but necessary travel and avoid airlines.

Q: Oil prices have fallen almost $20 a barrel since late July to just over $81 on Wednesday. Isn't that a good thing?

A: It's a mixed bag. It's great news for U.S. consumers and coming holiday sales because it's akin to a tax cut. What they aren't spending at the pump they can spend in stores and restaurants. But prices are falling because traders see too much oil produced for current demand. Oil demand has fallen as Europe, China, Brazil and other regions where economies are slowing. That oil prices are falling so sharply is a reflection of weaker demand from both consumers globally and manufacturers as industrial activity dips lower.

Q: Shouldn't lower energy prices reduce inflation, which is also good for U.S. consumers?

A: Normally yes. But these aren't normal times. The Federal Reserve and other central banks around the world have been working to spark inflation. They actually want an across-the-board rise in prices. The Fed and other central banks fear deflation, or a fall in prices. It is pernicious because it causes consumers and businesses to sit on the sidelines, expecting even lower prices. The Producer Price Index, the government's measure of inflation experienced by industry, was expected to rise in September, but Wednesday brought a surprise decrease of 0.1 percent. Coupled with weak growth and low inflation in Europe, fears of deflation are higher.

Q: Isn't the Federal Reserve about to halt bond purchases that combated deflation?

A: That's another factor weighing on investors. Since December 2012, the Federal Reserve has purchased trillions worth of mortgage and government bonds. The idea was to drive down the returns on these bonds, forcing investors into riskier bets on stocks, bonds and commodities. The effort has stimulated risk taking but distorted the value of a broad range of financial assets. Markets are trying to find a new starting point for pricing in the absence of stimulus, which ends this month. It likely portends more choppy water ahead.

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