The stock market had another tumultuous ride this week as disarray in Europe heightened fears of a global economic slowdown. Despite a late-day comeback on Friday, major stock indexes are down about 10 percent from the peak they reached in late April.
Declines of that size are known as a "correction." They are normal during a bull market and are even seen as a healthy way for a market to regain its bearings after a long period of uninterrupted gains. The correction that started this week is the first for the bull market that began in March of last year.
Whether the correction has mostly run its course or turns into a bear market, defined as a decline of 20 percent or more, is anyone's guess. Stock indexes ended with solid gains Friday after starting the day lower and dipping below 10,000; the Dow closed up 125 points.
The Dow Jones industrial average plunged 376 points Thursday, its worst one-day drop in more than a year. Stocks are now about where they were in early February and down 2 percent for the year.
Jacob Gold, a financial adviser and CEO of Jacob Gold & Associates in Scottsdale, Ariz., says the market collapse of 2008 is fresh in the memories of clients who have been peppering him with calls and e-mails this week.
"They're second-guessing themselves because they don't want to end up giving the economy the benefit of the doubt and having it hurt them," he said. "People are still licking their wounds from 2008 and they're not in a position to put themselves at risk like they once did."
The immediate catalyst for this week's sharp declines was deepening confusion over how Europe intends to get control of its public finances, restore order to financial markets and instill confidence in the continent's shared currency, the euro.
Germany broke ranks from its European neighbors this week, single-handedly reining in speculative trading in European bonds. And on Friday it was rebuffed in its calls for harsh punishments for European countries that consistently flout rules on fiscal spending limits.
Greece is struggling to cope with staggering debt, and investors fear it could end up dragging other economically weak European countries down with it. If Europe's banks crack down on lending, the thinking goes, other banks around the world could follow suit, tripping up economies around the world.
The unsettling news from Europe this week also reminded investors how tepid the U.S. economic recovery really is in historical terms. Gross domestic product rose at an annual rate of 3.2 percent in the first three months of the year, but that's not nearly as strong of a comeback as is typical after a deep recession. Companies also aren't hiring that much, unemployment is still 9.9 percent and the housing market hasn't recovered from its slump.
"Normally you would get a much stronger snapback," said Paul Ballew, chief economist at Nationwide Insurance in Columbus, Ohio, and a former senior economist with the Federal Reserve. "Given the magnitude of the downturn, growth should be much stronger than that already."
U.S. markets opened lower again on Friday, but a rally in financial shares helped stocks move higher. JPMorgan Chase & Co. and Bank of America Corp. were the biggest gainers in the 30 stocks that make up the Dow Jones industrial average. They and other financial shares rose after the Senate passed long-awaited financial reform legislation, removing a significant overhang for U.S. banks.
In other signs that some investors were regaining an appetite for risk, Treasury prices edged lower after spiking on Thursday, the dollar edged lower, commodity prices stabilized and gold prices fell.
The Dow rose 125.38, or 1.3 percent, to 10,193.39. The broader Standard & Poor's 500 index rose 16.10, or 1.5 percent, to 1,087.69. The Nasdaq composite index rose 25.03, or 1.1 percent, to 2,229.04.
The Dow fell below 10,000 during early trading Friday before recovering. It last fell through that level on May 6, when it briefly plunged nearly 1,000 points in an afternoon rout that was its biggest ever intraday slide. Regulators have said they are still unclear on what caused that brief plunge.
The three-week slide since the market hit its recent peak in late April has shaved $1.3 trillion of value from the S&P 500 index in the 19 trading days through Thursday. That's more than the $1 trillion Europe and the International Monetary Fund pledged to shore up weak European economies.
On the positive side, traders said it was encouraging to see that the S&P 500 came close to, but didn't fall below the level it touched on Feb. 8, its lowest point it reached so far this year. Market analysts pay close attention to technical indicators like that one, which they call "support levels."
With this week's bumpy ride and the "flash crash" of two weeks ago, individual investors have been calling financial advisers more, struggling to make sense of all the factors whipsawing the market.
"Uncertainty is driving investors' money right now," said Andrew B. Busch, global foreign currency and public policy strategist at BMO Capital Markets. "There are so many unresolved issues — Europe's debt crisis, the flash crash, financial reform — and nobody knows how its going to play out."
The Nasdaq composite index, which is dominated by technology stocks, has been more volatile than the broader market in the last week. Tech stocks tend to recover faster than those of other industries since businesses will often ramp up spending in computer equipment early in an economic recovery.
By the same token, those companies may be the first to feel the pinch if negative economic signs lead businesses to tighten their purse strings. Some money managers say those declines are overdone.
"I think a lot of good technology companies are being taken down unnecessarily in the latest downdraft," said Michael Cuggino, president and portfolio manager at Permanent Portfolio Family of Funds in San Francisco. "That may present some interesting opportunities."
Bond prices were mixed after jumping Thursday as investors dumped anything seen as risky. The yield on the benchmark 10-year Treasury note rose to 3.24 percent from 3.22 percent.