Wall
Street just suffered the worst day of the Trump presidency.
The
Dow closed down 666 points, or 2.5%, its biggest percentage decline since the
Brexit turmoil in June 2016 and steepest point decline since the 2008 financial
crisis.
A
strong jobs report showed wage growth is finally starting to pick
up. That's great news for workers, but it reinforced investors' concern about
inflation and the bond market.
"It's
all about rates. Asset prices and the economy have become addicted to low
rates," said Peter Boockvar, chief investment officer at the Bleakley
Financial Group. "Sentiment got euphoric. There is more froth that needs
to be taken off."
The sell-off knocked the Dow well
below 26,000. Both the Dow and S&P 500 suffered their biggest weekly drops
since early 2016 -- roughly 4% each.
Political
turmoil is adding to the uncertainty. Market analysts pointed to the clash
between the Trump administration and the FBI as another concern.
"There looks like a breakdown
of the institutions in our country," said Ian Winer, head of equities at
Wedbush Securities. "No matter what side you're on, that's not good."
While the
point decline on the Dow was large, it paled in comparison with the scary days
of the financial crisis. Friday's decline was 2.5%. The Dow plummeted nearly 8%
on a single day in October 2008.
The stock market is much calmer
these days, thanks to a strong economy, record corporate profits and the huge
business tax cut enacted by President Trump and Republicans in Congress.
Even with this week's slump, the
S&P 500 is just 3.9% below its all-time high.
But the tranquility that has
defined Wall Street's stunning rally since the election has been punctured. The VIX (VIX),
a measure of market volatility, soared 55% this week.
January's jobs report didn't settle
the market down. The economy added 200,000 jobs in January, and wages grew at
the fastest pace in eight years.
But if wages grow too fast, they
could eat into Corporate America's record profit margins.
The other concern: Wage growth
could be a sign that inflation, which has been mysteriously low for years, may
heat up. That would force the Federal Reserve to raise interest rates faster
than investors may be comfortable with.
Those worries are showing up in the
bond market. The 10-year Treasury yield reached a four-year high of 2.85% on
Friday. It was at about 2.4% at the start of the year.
Some
investors are worried rates could climb high enough to slow the economy by
raising borrowing costs. They also worry that higher returns on bonds will make
stocks look less attractive by comparison.
"Those rising rates are making
it harder to say there is no alternative to stocks," said David Kelly,
chief global strategist at JPMorgan Funds.
Former Fed Chairman Alan Greenspan said
this week that both stocks and bonds are in a "bubble."
Of course, this week's slide does
little to dent the overall gains the market has achieved since President
Trump's victory. The Dow and the Nasdaq have climbed more than 40% apiece since
the 2016 election. The S&P 500 has advanced for 10 consecutive months. That
hasn't happened since 1959.
Even stock market bulls have long
said that a pause -- or even a dip -- would help prevent the market from
overheating.
"We've just gone too far, too
fast," said Art Hogan, chief market strategist at B. Riley FBR. "We had this perfection of 2%
higher every week -- and that really is just not reality."
Some market analysts said the
political controversy over the release of the disputed GOP memo is rattling
Wall Street. "You've got trouble in the Department of Justice and the FBI
at the senior level," said Jeffrey Saut, chief investment strategist at
Raymond James.
"It all hit when the market
was ready to go down anyway. It just accelerated it," Saut said.
Wedbush's Winer said the biggest risk
is that Robert Mueller, the special counsel investigating Russian interference
in the election, is fired.
"If Bob Mueller is challenged
in a firing, or a prelude to a firing, then you're going to have a
problem," he said.
Other market analysts think Friday's
drop has little to do with Washington.
"We're not drawing a
connection between the political headlines and the market. Valuations for
stocks are high, and we were due for a pullback," said Luke Tilley, chief
economist for Wilmington Trust.
The latest corporate earnings,
which typically drive stock prices, left the markets unimpressed.
Shares of Google parent Alphabet (GOOGL) slumped
5% even after the tech behemoth posted its first $100 billion sales year.
Disappointing iPhone sales left Apple (AAPL) down
4%. ExxonMobil (XOM) sank
5% after its results widely missed
expectations.
Selling was widespread. Amazon was
one of just 27 stocks in the S&P 500 to finish the day higher.
"You've had a stock market that's
gone absolutely crazy based on tax reform juicing earnings," said Winer.
"And numbers are coming in that are OK, but not blowing the doors
off."
The question now is whether this
market turmoil will persist into next week, or whether investors have been
waiting on the sidelines come in to buy after the dip.
Tilley said his team expects there
will finally be a full-blown correction -- a 10% pullback from the recent
highs.
"But don't expect a bear
market unless there's an actual downturn in the economy," Tilley added.
--CNNMoney's
Chris Isidore and Paul R. La Monica contributed to this report.
http://money.cnn.com/2018/02/02/investing/stock-market-today-dow/index.html
It was the scariest day on Wall Street in years.
Stocks went into free fall on Monday, and the Dow plunged almost 1,600 points -- easily the biggest point decline in history during a trading day.
Buyers charged back in and limited the damage, but at the closing bell the Dow was still down 1,175 points, by far its worst closing point decline on record.
The drop amounted to 4.6% -- the biggest decline since August 2011, during the European debt crisis. But it was nowhere close to the destruction on Black Monday in 1987 or the financial crisis of 2008. Still, for investors lulled to sleep by the steady upward climb since Election Day, it was alarming.
The White House said in a statement that President Trump was focused on "our long-term economic fundamentals, which remain exceptionally strong." The statement cited strengthening economic growth, low unemployment and increasing wages for workers.
The trouble in the market began early last week, when investors focused on a number of lingering concerns.
If the economy gets much stronger, it could touch off inflation, which has been mysteriously missing for the nine years of the post-crisis recovery. That could force the Federal Reserve to raise interest rates faster than planned.
"People are dealing with the shock of seeing real inflation for the first time in a while," said Bruce McCain, chief investment strategist at Key Private Bank.
The sell-off wiped out the Dow and S&P 500 gains for the year, and left the Nasdaq barely in positive territory for 2018.
Investors have also been nervously watching the bond market, where yields have been creeping higher. As yields rise, bonds offer better returns, which makes them more attractive to investors compared with risky stocks.
Stocks sank throughout the day, then went off a cliff in the final hour of trading. The Dow was down 800 points at 3 p.m. Within minutes, it was down 900, 1,000 -- and then 1,500 points. At its low, the Dow was down 1,597 points, before buyers rushed in and limited the decline.
The Nasdaq slumped more than 2%, quickly turned positive, then sank again. It finished down almost 4%. The S&P 500, a broader gauge of the market than the Dow, declined more than 4%.
The plunge pushed stocks closer to what's called a correction, or a 10% decline from their most recent high point. The S&P 500 is down almost 8% from its all-time high.
"The stock market is throwing a tantrum," said Andres Garcia-Amaya, CEO of wealth management firm Zoe Financial.
"Take a deep breath," said Garcia-Amaya. "I know it's been a while since we had a day like today, but nothing has really changed from a fundamental standpoint."
The market started 2018 with a bang, but last week was the worst on Wall Street in two years. The selling gathered steam on Friday when the Dow plunged 666 points, or 2.5%, at the time its worst day since the Brexit mayhem of June 2016. Nearly $1 trillion of market value was erased from the S&P 500 last week.
"You had a market that was overbought and ripe for something to undermine its tranquility," said Mark Luschini, chief investment strategist at Janney Capital.
The VIX volatility index, a measure of market turbulence, skyrocketed a record 116% on Monday to the highest level since August 24, 2015, the last time the Dow plunged 1,000 points in a day. The spike signifies how calm Wall Street had been -- and how unprepared the markets were for trouble.
CNNMoney's Fear & Greed Index is flashing "fear," underlining a major shift in market sentiment from a week ago when it was sitting in "extreme greed."
The Russell 2000, an index of smaller stocks that have heavy exposure to the U.S. economy, turned negative for 2018 for the first time.
"Valuations got stretched and that led to a cascading effect today," said Sam Stovall, chief investment strategist at CFRA Research. "The market has to correct itself -- a resetting of the dials -- before this bull market can continue."
Investors' main concern is the sell-off in the bond market. The 10-year Treasury yield, which moves opposite price, spiked to a four-year high of 2.85% on Friday. It's a dramatic swing from 2.4% at the start of 2018. Higher yields could make normally boring bonds look more attractive when compared with risky stocks.
The U.S. economy is healthy. Friday's jobs report showed that wages grew at the fastest pace since 2009. That's a welcome shift by workers who have been dealing with anemic raises for years.
Has your paycheck gotten bigger thanks to the new tax bill? Will it make a difference? If so, what will you do with the extra money? Tell us about it here.
However, Wall Street is starting to get worried that the "goldilocks" environment of slow growth and mysteriously low inflation may be ending. Besides the fear of faster inflation and interest-rate increases, more robust wage gains could eat into record-high corporate profits.
No matter the cause, the stock market was long overdue to take a breather. Before Friday, the S&P 500 had gone the longest stretch ever without a 3% pullback. Now the S&P 500's record-long period without a 5% retreat is in jeopardy.
While they can be scary, market pullbacks prevent stocks from overheating and give investors who were stuck on the sideline a chance to get in. Janet Yellen, who just stepped down as Fed chief, told PBS on Friday that she still believes "asset valuations generally are elevated."
Despite the recent turmoil, the Dow remains up almost 40% since President Trump's election. The robust performance has been driven by strong corporate profits, healthy economic growth and excitement about the Republican tax cut for businesses.
Analysts at Bespoke Investment Group urged calm.
"Take a deep breath," the firm wrote in a research note on Friday. "For those investors that may have forgotten, this is what a market decline feels like."
The question is whether the market retreat deepens or whether investors buy at the dip, a mentality that has supported stocks for months.
"The fundamentals of the economy remain quite strong," said Janney's Luchini. "It's hard to make the case for why we should be down more than 10% -- unless we encounter negative economic news."
Key Bank's McCain agrees. "We believe this is not the beginning of the end and a tilt towards a bear market. It's premature for that," he said.
Wells Fargo suffered some of the worst of the selling on Monday. The No. 2 U.S. bank plunged 9% after unprecedented sanctions were handed down by the Fed late Friday.
--CNN's Liz Landers contributed to this report.
Stocks were pummeled on Friday and Monday. The Dow fell more than 1,800 points over two sessions. Here's what's going on.
1. Concerns that the Fed will raise rates
Stocks have been rising steadily since the election in part because the economy is so strong. Unemployment is historically low, and there are more open jobs than people to fill them. Companies are starting to pay workers more to retain existing employees and attract new hires. Businesses will eventually have to raise prices on the stuff they sell to afford their growing payrolls. In economics, that's called inflation.
Though the economy has been growing steadily for almost nine years, inflation has remained stubbornly and mysteriously low. The Federal Reserve combats inflation by raising its interest rates. The central bank has been unable to significantly raise its interest rates over the past decade, fearing it could stymie the economic recovery and perhaps cause prices to fall.
The Fed planned on raising interest rates slowly this year-- just three times in 2018. But if inflation picks up, the Fed could raise rates more often and more steeply than it had planned.
2. Rising interest rates
When the Fed raises rates, the cost of borrowing money increases. That means companies have to pay more for their loans, which cuts into corporate profits. It also means Americans will pay more for mortgages and loans.
Another reason the stock market has risen so much over the past year has been the steady growth in corporate profits. Companies are healthy, and investors have rewarded them by pushing up their stock prices.
When interest rates rise sharply, stocks often fall. Investors worry that businesses' profit parade will slow down.
3. Worries about the bond market
Stocks have also been on a tear because they have been one of the only investments with a decent return. U.S. Treasury bond yields have been so low that many stock dividends are paying better.
But stocks are a higher-risk investment than bonds, which are backed by the United States Treasury. If bond yields start to rise, investors will want to take some of their money out of stocks and put it into safer bonds.
Sure enough, bond yields hit a four-year high Friday. (They pulled back a bit on Monday.) The recent tax bill has forced the Treasury to borrow more money, which will put more bonds into play. A supply glut could devalue bonds. Prices and yields move in opposite directions, and bond buyers will want a higher yield (and lower price) to make it worth their investment.
Inflation is bad for bonds, too. If borrowing costs increase, bond investors will want more return -- a higher yield.
Attractive yields on a safer investment have made stocks suddenly less attractive.
4. Too far, too fast
Stocks have been rising pretty much in a straight line since November 2016, and that's not exactly healthy. Stock market analysts believe the stock market is long overdue for a 5% pullback or even a 10% correction.
A cooling-off period would be a good thing. It would make stocks cheaper and more attractive to investors, especially if the underlying companies are healthy, cranking out strong sales and profits.
The market finally began to come down to earth -- just a bit -- this week, and investors wonder whether this is the beginning of a correction. There could be a little groupthink taking place in the downturn.
