Dow Jones falls by more than 1000 amid high interest scare

Feb 10, 2018, 02:03
Dow Jones falls by more than 1000 amid high interest scare

All major USA stock market indexes fell precipitously in the first weeks of February, shedding more than $1 trillion in market capitalization and causing stock volatility indexes to run wild.

US stocks moved away from early losses to trade higher on Wednesday as investors returned to a market still cautious from the Dow Jones Industrial Average's historic decline earlier this week. During the most recent financial crisis in 2008 and 2009, stocks tumbled over 38 percent - but fully recovered in less than five years.

On Wall Street, many companies that rose the most over the a year ago have borne the brunt of the selling.

"This is not the end of the world, but it is uncomfortable", said Rich Guerrini, CEO of PNC Investments. "The mystery now is what level on the 10-year Treasury will, if not break the bull market's back, at least knock it back a few steps".

Fears about inflation and soaring bond yields sent the Dow plunging 6.5% through the first four trading days of this week. "Is the bond market telling us something we don't know?" The Dow and S&P are now back in positive territory for 2018.

Similarly, the bear market that began in 1966 was also short in duration - it lasted only eight months. Britain's FTSE 100 fell 1.5 percent and the French CAC 40 lost 2 percent.

It's a big shift from 2017 and the beginning of 2018, when the stock market went the longest period ever without tumbling.

"Despite violent moves in the last couple days in the market, fundamentals in the economy are very strong and it's not just the US, it's throughout the global economy", said Alicia Levine, head of global investment strategy at BNY Mellon Investment Management in NY. "It can take two to three weeks to work through the system".

The question now is whether "this draws a line under the recent stock market correction or whether this is merely a dead cat bounce", currency analysts at ING wrote in a report on Wednesday. Higher bond yields also make stocks look less attractive by comparison.

"We had an epic run". That's because it takes a recession to simultaneously damage both the valuations multiples and earnings growth of businesses, says Paul Eitelman, a strategist at Russell Investments.

"In the context of the rises we've seen, certainly this kind of pull-back of 5-10% is quite normal for markets - it just hasn't been normal for the last couple of years where we've seen very low levels of volatility and very small levels of weekly or monthly moves". If rates rise quickly, that argument becomes much less persuasive. "Obviously people are reacting".

But the speed at which the market plunged has left many investors spooked, especially those who have been lulled by a almost nine-year-old bull market. As happened last Monday - a day when Dow Jones lived a historic bump - investors ' attention is directed towards bond market, due to fear of an increase in price of money, and this causes volatility to rebound in parquet.

Equity investors are anxious the likelihood of a stronger U.S. economy and higher inflation could lead the Federal Reserve to boost interest rates more times than previously anticipated.

However, with Wall Street expected to post another triple-digit drop on the open, that could change.

Washington is putting more pressure on rates. The bipartisan agreement boosts federal spending limits by $300 billion over the next two years. The compromise, coupled with Republican tax cuts, could lift the federal budget deficit to $1.07 trillion in fiscal 2019, according to Bank of America estimates.

In Asia on Friday, Japan's Nikkei 225 shares index closed down 2.3% while China's Shanghai Composite slumped 4.1%. That raised the alarm about higher inflation and, with it, potentially higher interest rates.

Bank of America analysts warned that the Senate agreement will contribute to "higher rates" and raise "risks for tighter overall financial conditions".

The up-and-down swings followed a drop of 10% from the latest record highs set by major US indexes just two weeks ago.

That's still the worst one-day percentage loss in stock market history. American Express and Intel were the two biggest losers on the Dow.

The chaotic week on global markets also comes as several markets around the world sit on, or near record highs.

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