Alex Dryden, global markets strategist for JPMorgan Asset Management, said Erdogan showed no signs of changing course Friday, and investors are losing hope that Turkey's government has the knowledge or independence needed to deal with the country's financial problems.
"There was some hope that maybe they'd step back from the brink and you'd see a re-establishment of central bank independence," he said. While Dryden and other analysts say Turkey's problems aren't a major risk to the financial system, investors didn't wait to find out Friday.
They sold stocks and bought U.S. dollars and government bonds. The bond purchases sent interest rates lower, which hurt banks. The dollar got stronger, partly because the Turkish lira nosedived, and major exporters like technology, basic materials and industrial companies sank.
The S&P 500 slid 20.30 points, or 0.7 percent, to 2,833.28. That was its worst loss in a month and ended a five-week winning streak for the index by wiping out its gains from earlier this week. The Dow Jones Industrial Average dropped 196.09 points, or 0.8 percent, to 25,313.14. The Nasdaq composite sank 52.67 points, or 0.7 percent, to 7,839.11. It had risen for eight days in a row.
The Russell 2000 index of smaller-company stocks took a smaller loss of 4.08 points, or 0.2 percent, to 1,686.80. The companies in that index are less reliant on exports, and the stronger dollar makes their imports less costly.
Investors are concerned about Erdogan's economic views. He says higher interest rates lead to higher inflation, the opposite of what standard economic theory says. As a result he's pushed Turkey's central bank to keep interest rates low, threatening its independence and preventing it from shoring up the lira.
The U.S. is the biggest importer of Turkish steel, and on Friday President Donald Trump said he will authorize higher tariffs on steel and aluminum from Turkey, a NATO ally. That sent the lira down even further. It's down 40 percent this year against the dollar.
The U.S. sanctions come after Turkey arrested an American pastor and put him on trial for espionage and terror-related charges. The weakening lira has been pushing up the cost of goods for Turkish people and has damaged international investors' confidence in the country. Since some of Turkey's debt is in dollars, it's also making the country's financial situation worse.
European banks fell sharply. The U.S.-listed shares of Germany's Deutsche Bank lost 4.7 percent to $11.82 and Spanish Banco Santander fell 4.7 percent to $5.19. Dryden, of JPMorgan Asset Management, said Erdogan has replaced independent advisers and leaders with relatives and supporters and set off a "gradual process of eroding economic credibility among financial and economic institutions."
Bond prices jumped. The yield on the 10-year Treasury note fell to 2.87 percent from 2.93 percent. That helped send bank stocks lower. JPMorgan Chase slid 1 percent to $115.73 and Citigroup retreated 2.4 percent to $70.26.
Emerging market currencies fell and the dollar jumped. The ICE U.S. Dollar Index was already trading around annual highs and it rose another 0.9 percent, a large move. The euro fell to $1.1398, its lowest in more than a year, from $1.1542. The dollar fell to 110.64 yen from 111.04 yen after a strong economic growth report form Japan.
Germany's DAX fell 2 percent and the CAC 40 in France fell 1.6 percent. Britain's FTSE 100 lost 1 percent. The Nikkei 225 index in Japan lost 1.3 percent. Hong Kong's Hang Seng gave up 0.8 percent. In South Korea, the Kospi lost 0.9 percent.
Energy companies rose slightly as oil prices increased. Benchmark U.S. crude oil rose 1.2 percent to $67.63 a barrel in New York and Brent crude, the standard for international oil prices, rose 1.1 percent to $72.83 a barrel in London.
Wholesale gasoline rose 2 percent to $2.04 a gallon. Heating oil added 1.3 percent to $2.14 a gallon. Natural gas lost 0.4 percent to $2.94 per 1,000 cubic feet. Online discount retailer Overstock.com surged 7.9 percent to $41.65 after it said private equity firm GSR Capital will make an investment in its blockchain business.
Overstock is one of the few major retailers that accepts payment in bitcoin, and its stock surged as bitcoin prices rose last year. However digital currency prices and the company's stock have both dropped in 2018.
The Labor Department said consumer prices climbed 2.9 percent in July compared with a year ago. The main cause was an increase in housing prices. That matched June's pace, which was the highest in six years.
Gold dipped 0.1 percent to $1,219 an ounce. Silver fell 1.1 percent to $15.30 an ounce. Copper lost 0.8 percent to $2.74 a pound.
AP Markets Writer Marley Jay can be reached at http://twitter.com/MarleyJayAP His work can be found at https://apnews.com/search/marley%20jay