Dow dives 4.2% on interest fears

Investors uneasy over rates, inflation rise, analysts say

Posted: February 9, 2018 at 4:30 a.m.

Trader Michael Milano (front) watches stocks plummet Thursday morning on the floor of the New York Stock Exchange. By day’s end, all the 2018 gains for the Dow Jones industrial average had been wiped out.

The Dow Jones industrial average fell 1,032 points into the red, down 4.2 percent, to close at 23,860 as fears deepened over rising interest rates. Its steep dive in the final minutes of trading put the Dow in correction territory.

The technology-laden Nasdaq and the broad Standard & Poor's 500 stock indexes also drifted lower during the day -- and each was down more than 3 percent. Trading volumes were 50 percent above normal.

The 3 percent pullback Thursday across U.S. indexes is something that did not happen in all of 2017. And the 2018 gains for the Dow and S&P have been wiped out.

Many are expecting more wild swings ahead as the CBOE Volatility index is holding at twice its level from a week ago.

It's the fourth ugly day in global markets. European stocks saw across-the-board losses, led by Germany's blue-chip DAX, which lost 2.6 percent, or 330 points. Most Asia indexes were positive overnight.

All major sectors were down Thursday, with technology, real estate and financials leading the plunge, signaling investor unease around interest rates and the prospect of higher inflation.

Alexandra Coupe, associate director investment manager at Pacific Alternative Asset Management Co., said rising inflation makes stocks less attractive. Stocks over the long term create more wealth than fixed-income bonds, but they are more volatile and have more risk.

"If I have to choose bonds or equities, with interest rates going up, bonds just got more attractive," she said.

Coupe said the volatility is coming about because investors are having difficulty deciding between stocks and bonds at the moment. There are risks from moving wholesale from stocks to bonds.

Use the form below to sign up for any or all of the Arkansas Democrat-Gazette's free newsletters:


"You don't want to move too much too soon," Coupe said. "You don't want to be caught in fixed income as rates are moving up. That's why everybody is going back and forth. We haven't had inflation, and now we have it and everyone freaks out. Be careful what you wish for."

The yield on the U.S. 10-year Treasury bond touched a four-year high before falling back to 2.83 percent. A 3 percent yield is looked upon by investors as a motive for people to flee the risk of stocks for the relative safety of bonds. When bond prices go lower, their yield increases.

"There is a lot of concern in the rising yield in the 10-year Treasury note," said David Kass, professor of finance at the University of Maryland. "As it approaches 3 percent, concerns about inflation and competition for stocks by fixed income securities are increasing."

Some believe the 3 percent yield is inevitable. Bond yields are rising as the Federal Reserve trims its U.S. bond holdings. The Treasury also is having to borrow more money, partly because of the tax cuts, and issuing more debt tends to raise yields.

Thursday's fluctuations came despite good economic news. Social-media company Twitter posted its first profit, and Yum Brands, Cardinal Health and Tyson Foods exceeded earnings expectations. Nearly 80 percent of companies that have reported so far this earnings season have surprised analysts to the upside.

For a market that hadn't fallen 3 percent from any high in more than a year, the week's action was enough to rattle even the biggest equity bulls. Accustomed to buying the dip, that wisdom is now in question when more selling by speculators may be imminent.

"There's some big-money players that have really leveraged to the low rates forever, and they have to unwind those trades," said Doug Cote, chief market strategist at Voya Investment Management. "They could be in full panic mode right now."

The losses were broad. Eight stocks fell for every one that rose on the New York Stock Exchange, and 490 of the companies in the S&P 500 took losses.

As the equity selling intensified, haven assets grew attractive. Gold futures erased losses to push higher, the yen strengthened and even Treasury notes pared the worst of their declines.

Some say the fluctuations are because of the good news, with fears that an overheated economy and nascent inflation will push the Federal Reserve to raise rates. The latest inflation figures are anemic at 1.7 percent.

"Investors are nervous about three things," said Larry Hatheway, an economist and Zurich-based asset manager. "There is an emerging inflation story in the U.S. -- and rising U.S. inflation makes monetary policy less predictable. Accelerating inflation may crimp corporate profits. And the Fed may hesitate to come to the rescue. They won't be able to provide that nice predictability and certainty that they provided ever since they started the rate hikes a few years ago."

LPL Research released a report titled "Volatility is Back," which pointed to fear of rising interest rates as the source of the recent swings but cautioned that the economy is fundamentally strong.

"The primary culprit was higher-than-expected wage growth in the January jobs report, which may have increased fears that the Federal Reserve would be more aggressive with interest rate hikes in 2018," according to LPL. "However, the selling pressure unmasked a variety of issues, including investor complacency and the difficulty of unwinding crowded and complex trades involving leverage, or borrowed money."

"Though never any fun to endure," it said, "pullbacks are a normal course for long-term investing."

Thursday's markets reflected the recent craziness in stocks. The Dow moved nearly 500 points during trading Wednesday before closing down 19 points, or 0.08 percent, at 24,893. Standard & Poor's 500 index and the Nasdaq also finished down Wednesday.

Information for this article was contributed by staff members of Bloomberg News and The Associated Press.

A graph showing the Dow Jones industrial average

A Section on 02/09/2018