Dow drops more than 1,400 points in second day of significant market sell-off
The Post’s Heather Long explains what’s
going on with the Dow Jones industrial average, which has retreated more
than 1,000 points in the last two sessions.
(Jhaan Elker/The Washington Post)
The
Dow Jones industrial average plunged more than 1,400 points in
afternoon trading on Monday as volatility returned to the stock market
with a vengeance after a year of rare tranquility.
The Dow has
retreated more than 1,700 point in the last two sessions, a decline
pushing 5 percent and shattering long-term momentum. The index was
swinging 100 points in minutes Monday afternoon as Wall Street wags
tried to decode events.
One of the big worries is that the
Federal Reserve, under new chairman Jerome Powell who was officially
sworn in Monday, will accelerate interest rate hikes, stoke inflation
and slow the economy. A slowing economy would likely turn the bull
market toward bearish.
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There
was also focus on the 10-year Treasury bond, a closely watched
harbinger of investor sentiment. The yield’s rise to 3 percent is widely
believed to be a marker for investors to eschew equities for the
appetizing stability of bonds.
”If the yield on the 10-year hits 3
percent in the next several days, equities are likely to decline
dramatically because of fears of the Federal Reserve aggressively
slowing down the economy by raising interest rates,” said James Norman,
president of QS Investors.
Bond yields are rising as
the Federal Reserve trims its U.S. bond holdings. The U.S. Treasury is
also having to borrow more money, partly because of the tax cuts, and
issuing more debt tends to raise yields.
Monday’s turbulance came
on the heels of Friday’s 666-point Dow decline, the sixth-highest point
drop in Dow history but only around 2.5 percent from its lofty highs.
The Standard & Poor’s 500-stock index was down four of the last
five sessions heading into Monday. The technology-laden Nasdaq was down
six of its last eight sessions as markets opened Monday.
Blackstone
Group chief operating officer Tony James said in an interview on CNBC’s
Squawk Box Monday that stocks were “fully valued” and “you could easily
see a 10 to 20 percent correction sometime this year.”
Many
observers believe healthy corporate earnings justify the robust stock
prices. With half of the S&P 500 reporting earnings so far this
season, more than 80 percent of companies are beating expectations.
“I see this decline as an opportunity given that corporate earnings are
rising, interest rates remain low, despite having risen recently, and
economic indicators are pointing up,” said Daniel P. Wiener, chief
executive of Adviser Investments, a Newton, Mass.-based firm. “Even at
2.85 percent, the 10-year’s yield is simply back to where it was four
years ago. It’s not setting some new kind of record other than its rapid
ascent.”
Foreign indexes were down across the board as worries over inflation
and rising U.S. Treasury bond yields swept through financial markets.
The FTSE was down 1.46 percent and the Nikkei 225 finished down 2.55
percent.
Utilities, Real Estate Investment Trusts and
other reliable, dividend-heavy stocks that resemble bonds are being hit
by the rise in bond yields. Stocks were hit hard across the board with
only technology surviving Monday’s bloodletting in the Dow. Apple,
Cisco, Intel and Microsoft were all on the upside as the rest of the
30-stock blue chip index went negative.
Delta, Chevron, Hess and D.R. Horton are all more than 10 percent off their 52-week highs as the market retreats.
Many hailed the bounce in the markets over the last week as part of the
natural ebb and flow of stocks. The relative serenety over the last
year where markets seemed on a relentless, upward arc is an anomoly.
Luke Tilley, chief economist at Wilmington Trust, the wealth and
investment advisory arm of M&T Bank, said a correction would be
healthy for the market because it would return some element of
volatility, which has been markedly absent over the past year.
“Ultimately,”
he said, “the bottom line is investors are dealing with a highly valued
equity market that is supported by strong economic data in earnings.”
The market volatility arrived last week after an unusually long period
when it appeared there was no stopping its upward march. The S&P 500
in January saw its 10th consecutive monthly gain, the longest in 59
years.
Friday’s markets went tumbling on good economic news as
the Labor Department reported a 2.9 percent increase in hourly earnings.
That’s good news for workers but creates nervousness among equity
investors concerned that the rise will fuel inflation.
The
10-year bond was trading at 2.851 percent on Monday, short of the feared
3 percent marker where investors consider leaving equities for the
relative safe returns of bonds.
But inflation worries abound,
with some harkening back to the grim economics of the 1970s when
inflation soared into double digits.
“Inflation is the current
bugbear but it’s also a convenient excuse for taking profits in a new
year when tax rates have fallen, on short term gains at least, given the
heights to which the market has risen,” Wiener said.
There
was more good news on Monday as the Institute for Supply Managment
reported a surge in service industry orders that was the fastest pace in
a decade.
“The service side of the economy was very robust in January,” Tilley said. “The economy is still doing well.”
The
market has not had a 5 percent correction for more than 400 days.
Historically, corrections of 5 percent occur every 90 to 120 days.
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