Arthur J. Villasanta – Fourth Estate Contributor
New York, NY, United States (4E) – The Dow Jones Industrial Average plunged 1,033 points to its second-worst drop in history on Feb. 8, entering correction territory after extending its losses in the recent sell-off to more than 10%.
Antsy investors now cast worried eyes on when the markets will plunge into “bear” territory, which is defined as a 20% drop in prices. This looming bear market will be the first in nearly a decade.
This head spinning fall follows the Dow’s record 1,175-point drop on Feb. 5, which is being fanned by fears the era of low interest rates and modest inflation that drove stock prices to fantastic record highs might be coming to an end. The Feb. 5 dive erased the Dow’s gains for the year.
At one point, the Dow was down as much as 1,600 points. The Dow’s plunge was the biggest ever in terms of points.
On Feb. 8, the Dow fell by more than 1,000 points for the second time this week, plunging 4.15% to 23,860. The Standard & Poor’s 500 stock market also fell into correction territory. Its 10.2% drop since its Jan. 26 record high is its largest since a 14.2% drop ending in February 2016.
The NASDAQ lost 274.8 points or 3.9% to 6,777.1. All key European exchanges mirrored the rout on Wall Street.
The 100 share index in London closed 1.49% lower at 7,170.69 points. Germany and France fell 2.6% and 2%, respectively.
The dive in Europe extends a sell-off that started last week with nervous investors driven by the fear that inflation might rise more quickly than expected, leading policymakers to raise interest rates.
The Bank of England lent support for that view by leaving interest rates where they were at 0.5% at its meeting. It did, however, say a strengthening economy meant interest rates were likely to rise sooner than markets expect.
Bond yields in the U.S. have also risen in recent weeks, typically a signal of higher rates. On Feb. 8, the yield on the 10-year Treasury note rose to a recent four-year high of 2.88%, sparking fears rates might exceed the key 3% level faster than expected. At that level, bonds become a more attractive investment and draw money away from stocks.
“The Dow has been hit by a tsunami of volatility,” said Paul Schatz, president of Woodbridge, Conn.-based investment management firm Heritage Capital. “The market is repricing in a lot of factors at once. And rates have run up fast. The market always has a tough time when things happen in a linear fashion.”
The correction occurred even though Wall Street and Donald Trump claim the health of the economy, labor market and U.S. businesses remain strong.
Analysts said the market volatility was ignited by a report released last week showing that hourly wage growth rose at its fastest pace since 2009. This strong pay data sparked fears of coming wage inflation, which intensified worries the Federal Reserve might hike rates more often this year than the three times it had originally planned.
“The market has undergone a psychological change,” says Doug Ramsey, chief investment officer at The Leuthold Group in Minneapolis. “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.”
Wall Street has been calling for a correction for some time, given the market’s stunning rise, but the plunge was more violent and faster than expected.
Shares in financial, technology and consumer companies led the declines on Feb. 8, which spread to every sector. American Express and Intel were the two biggest losers on the Dow.
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