Dow drops 4.1% in week, bond yields climb
By Corrie Driebusch, Riva Gold and Daniel Kruger
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (February 3, 2018).
A rare burst of volatility jolted financial markets and sent
stocks and bonds tumbling Friday, a sharp shift from the
tranquility that has characterized much of the nearly nine-year
bull-market run.
The Dow Jones Industrial Average dropped 2.5%, its biggest
one-day decline since the U.K.'s surprise vote to leave the
European Union in June 2016. Meanwhile, the yield on the benchmark
10-year Treasury note climbed to 2.852%, its highest level since
January 2014.
Bond investors have started to take the threat of inflation more
seriously, and an anticipated rise in interest rates spooked stock
investors. When yields go up, it costs companies more to borrow
money and can trigger fears that the Federal Reserve may need to
raise interest rates more quickly to keep up with inflation.
For most of the current bull market, easy money policies had
pushed investors away from the paltry returns offered by government
debt and into stocks. Investors continued buying shares, even after
some analysts began to warn they were looking relatively pricey
compared with historical averages.
Now, the fear is that the past week's selloff -- the Dow posted
a 4.1% decline, its biggest weekly drop since January 2016 -- could
mark the start of a more tumultuous period in markets.
"People are questioning the conditioning that every dip will be
bought," said Mohamed El-Erian, chief economic adviser at Allianz,
referring to both the bond and stock markets. He added the global
economy continues to be strong, but he expects this pickup in
gyrations to continue.
Still, many investors and analysts embraced the newfound
volatility, calling it healthy after the swift -- and likely
unsustainable -- stock-market rise that ushered in the New Year.
The Dow rose 5.8% in January as strong economic and
corporate-earnings growth invigorated investors, who poured $100
billion into equity funds in January, their biggest monthly inflow
on record, according to fund-tracker EPFR Global.
"Do I think stocks will continue to rise at their same pace?
Absolutely not," said Kate Warne, investment strategist for retail
brokerage Edward Jones. "I think stocks will continue to rise, but
it'll be a much more volatile ride."
The Dow posted two moves of at least 1% in the past week,
compared with 10 in all of 2017. The CBOE Volatility Index, which
measures expected stock swings over the next month, on Friday
notched its highest close since November 2016, when jitters around
the U.S. presidential election escalated.
The recent volatility continued Friday following the January
jobs report. Wage growth accelerated, rising 2.9% over the past
year, the strongest year-over-year gain since June 2009, according
to the Labor Department. Government-bond yields rose as investors
interpreted the wage gains as a sign the tightening labor market
may finally trigger higher inflation. Yields rise as bond prices
fall.
The Dow fell 665.75 points to 25520.96 Friday, its biggest
one-day point drop since December 2008. For the week, the blue-chip
index fell nearly 1100 points, the most since the throes of the
financial crisis in October 2008.
Although the magnitude of the falls were much greater a decade
ago when the Dow traded around 8000 points, Friday's swift drop
still took many traders, analysts and investors by surprise.
The S&P 500 lost 59.85 points, or 2.1%, to 2762.13 and the
Nasdaq Composite dropped 144.92, or 2%, to 7240.95. All three
indexes remain higher in 2018, with the Dow and S&P 500 up more
than 3% and the Nasdaq up 4.9%.
Some traders said the dour mood around stocks and bonds was
amplified by Friday's political developments. House Republicans
released a memo alleging surveillance abuses by the Federal Bureau
of Investigation during its Russia probe.
Still, many other investors said the stock market is likely to
remain strong due to a brightening earnings picture. Analysts'
projections for U.S. earnings in 2018 have been upgraded
significantly over the past month following changes to the U.S. tax
code, while results for the fourth quarter have largely exceeded
analysts' expectations.
"I don't see much panic out there," said David Kelly, chief
global strategist at J.P. Morgan Asset Management. The real danger
for stocks isn't Treasury yields climbing above 3%, but a
recession, he said, adding that as long as central banks maintain
their slow and steady pace of rate increases and corporate earnings
remain solid, he doesn't foresee a recession in the near
future.
Corporate results drove many of Friday's biggest share moves.
Earnings from U.S. technology giants late Thursday were mixed.
Shares of Amazon.com climbed $39.95, or 2.9%, $1,429.95 after its
quarterly profit topped $1 billion for the first time. Apple shares
fell $7.28, or 4.3%, to $160.50 after reporting a slight drop in
iPhone sales but overall beating expectations. Google parent
Alphabet dropped $62.39, or 5.3%, to $1,119.20 after posting
weaker-than-expected earnings, even when stripping out a big
one-time tax hit.
Exxon Mobil and Chevron helped drag down the Dow, taking 79
points off the index, after reporting profits that missed
expectations, despite the recent rally in crude prices.
In Europe, shares of Deutsche Bank fell 6.2% after it reported a
sizable loss for the fourth quarter and its third consecutive
full-year loss. The Stoxx Europe 600 fell 1.4%, ending the week
down 3.1%, its biggest fall since February 2016. Meanwhile, major
stock indexes in China, South Korea and Japan all ended the week
down more than 1%.
Although stocks globally suffered large declines, some analysts
and investors emphasized that it isn't the pullback that should be
viewed as unusual, but the steady climb higher since early
2016.
"This moment was inevitable in many ways," said Jurrien Timmer,
director of global macro at Fidelity Investments. "This week's
decline doesn't feel good, but it's good the stock market is
listening to the bond market."
Write to Corrie Driebusch at corrie.driebusch@wsj.com, Riva Gold
at riva.gold@wsj.com and Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
February 03, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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