US STOCKS-Wall St tumbles over 2% on growth worries; focus turns to Fed

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* Energy, bank stocks lead market declines

* All eyes on Fed’s policy meeting later this week

* Major airlines mixed as U.S. relaxes travel rules

* Indexes down: Dow 2.23%, S&P 2.24%, Nasdaq 2.63% (Adds comment, details; updates prices)

By Devik Jain

Sept 20 (Reuters) – U.S. stocks sharply dropped on Monday as risk-off sentiment gripped investors on concerns over the pace of global growth and a possible spillover from China Evergrande’s troubles, ahead of the Federal Reserve’s policy meeting later this week.

The Nasdaq tumbled as much as 2.9% in afternoon trading, led by declines in growth names including Microsoft Corp, Google-owner Alphabet Inc, Amazon.com Inc, Apple Inc, Facebook Inc and Tesla Inc.

“The potential default of the Chinese property developer could have far reaching and unexpected consequences. There’s the X-factor, the potential that ripples from one collapse could erode other sectors,” said Danni Hewson, financial analyst at AJ Bell.

“If the Chinese economy is dented, what happens to demand for those nice-to-haves like a shiny new Tesla. Shares in the car company have tumbled and the Nasdaq with them, in fact the tech heavy index makes for pretty grim viewing today.”

All the 11 major S&P sectors declined. Economy-sensitive industrials, financials and energy dropped between 1.9% and 4%.

The banking sub-index shed 3.9%, tracking U.S. Treasury yields as worries about the default of Evergrande appeared to affect the broader market, with commodities slipping and investors flocking to the perceived safety of bonds..

Wall Street’s main indexes have been hurt this month by fears of potentially higher corporate tax rates denting earnings and have shrugged off signs inflation might have peaked.

The S&P 500 is down 4.6% from its intra-day record high hit on Sept. 2 and is on track to snap a seven-month winning streak.

“This is just an environment where there’s been a lot of money that has been rewarded for excessive risk taking. And now we’re seeing a little bit of that risk come off… this is classic profit taking,” said Dennis Dick, a trader at Bright Trading LLC.

“I still think a big reason for (today’s selloff) is the White House and the Biden administration talking about raising the capital gains rate.”

All eyes on Wednesday will be on the Fed’s policy meeting, where the central bank is expected to lay the groundwork for a tapering, although the consensus is for an actual announcement to be delayed until the November or December meetings.

At 13:30 p.m. ET, the Dow Jones Industrial Average was down 772.43 points, or 2.23%, at 33,812.45, the S&P 500 was down 99.47 points, or 2.24%, at 4,333.52.

The Nasdaq Composite was down 396.26 points, or 2.63%, at 14,647.71, set for its worst day since May 12.

Strategists at Morgan Stanley said they expected a 10% correction in the S&P 500 as the Fed starts to unwind its monetary support, adding that signs of stalling economic growth could deepen it to 20%.

The CBOE volatility index, known as Wall Street’s fear gauge, hit its highest level in over four months.

Airline carriers traded mixed after the United States relaxed travel restrictions on air passengers from China, India, Britain and many other European countries who have received COVID-19 vaccines in early November.

Declining issues outnumbered advancers for a 8.44-to-1 ratio on the NYSE and for a 5.54-to-1 ratio on the Nasdaq.

The S&P index recorded no new 52-week high and three new lows, while the Nasdaq recorded 19 new highs and 165 new lows. (Reporting by Devik Jain and Sagarika Jaisinghani in Bengaluru; Editing by Arun Koyyur, Maju Samuel and Sriraj Kalluvila)

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