Dow tanks 1000 points, ends 4% lower as selloff deepens

Dianna Christensen
February 10, 2018

The Dow dropped 1,032.89 points Thursday, it's second-largest point drop, to 23,860. Or, are we simply returning to a more "normal" cycle of higher yields and higher interest rates?

The selloff in world stock indexes deepened on Thursday, with the fall in US stocks confirming a correction for the market, in another volatile session stirred by concern over rising bond yields.

The pan-European Stoxx Europe 600 index declined 1.6%.

"This is not the end of the world, but it is uncomfortable", said Rich Guerrini, CEO of PNC Investments.

To some extent, longer-dated U.S. treasury bond yields have been playing catch up with the front-end of the USA treasury curve, as shorter-dated yields had already seen a meaningful rise in the fourth quarter of 2017. While viewed by many as a handy way of gauging relative value, corporate earnings and bond yields aren't the same - they move with different volatility and different sensitivity to inflation.

"If we see 3.0 percent next week that is going to spook people more - the equity market psyche is fragile at this point". We haven't had inflation, and now we have it and everyone freaks out.

The Dow closed below 24,000 for the first time since late November.

Trading has been choppy for days, and the market has swung in wide ranges - up and down almost 2,300 points over the past week. The S&P 500 and Nasdaq also lost more than 1% apiece. It has raised the benchmark fed funds rate five times since December 2015, to a range between 1.25%-1.5%, having left them at zero for seven years.

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

"A big down day like Monday doesn't just go away".

"What we're seeing today is continued concerns around interest rates going higher, around valuations in the stock market", said Chris Zaccarelli, chief investment officer with Independent Advisor Alliance in Charlotte, North Carolina. But it certainly prompts central banks to take monetary action, which reduces liquidity in the system.

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Stocks are sliding further on Wall Street, putting the market on track for its second big weekly drop in a row. But such calm is unusual, and stocks overheated.

Wall Street has enjoyed a record-breaking run ever since Trump's 2016 election on hopes of a beneficial impact from the United States president's pro-business tax-cutting policies. "There was euphoria because there hadn't been a pullback", said Jeffrey Schulze, investment strategist at ClearBridge Investments. They got a lot of steroids of liquidity and low interest rates and refinancing, whereby US Fed picked up every junk subprime loan in the market.

An improving outlook internationally is adding to pressure on global fixed income markets.

William Dudley, president of the Federal Reserve Bank of NY, sought to downplay the recent market moves, calling them "small potatoes". Analysts at Bank of America Merrill Lynch boosted their fiscal 2018 and 2019 deficit forecast by $35 billion and $20 billion, respectively.

Wall Street anticipates that more government spending will force the Treasury Department to borrow more money by selling additional bonds.

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

The stock market is still up dramatically since President Trump's election.

The Dow plunged more than 1,100 points on Monday, in its biggest daily point decline ever, as a stronger-than-expected U.S. jobs report stoked fears that interest rates would be hiked quicker than previously anticipated.

In a speech on Monday, European Central Bank President Mario Draghi said the bank was increasingly confident that inflation would rise along with economic growth, but currency market volatility is a potential obstacle. The job market remains healthy, as evidenced by a report Thursday that applications for unemployment benefits are at a 45-year low.

"I think the economy is on a very solid growth path", he said.

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