STOCK SHOCKER
Dow suffers historic loss
U.S. stocks plunged the most in 6½ years, with the Dow Jones industrial average sinking more than 1,100 points, as the equity sell-off reached a fever pitch amid rising concern that inflation will force interest rates higher. Treasuries rallied and gold rose on haven demand.
Volatility roared back into American equity markets, as the S&P 500 Index sank 4.1 per cent to wipe out its January gain and turn lower on the year.
The index capped its worst day since the U.S. lost its pristine credit rating, topping the rout that followed China’s shock devaluation of the yuan, the Brexit sell-off and jitters heading into the presidential election. Trading volume was almost double the 30-day average. All but two stocks in the broad gauge declined.
“This is classic risk off that may not end any time soon,” says Win Thin, head of emerging-market currency strategy at Brown Brothers Harriman.
In New York, the Dow finished the day down 1,175.21 points to 24,345.75, or 4.6 per cent, erasing its gains for the year.
The S&P 500 index fell 113.19 points to 2,648.94 and the Nasdaq composite index dropped 273.42 points to 6,967.53.
The Dow’s point loss would be its biggest of all time, though in percentage terms, its 5.6-per-cent decline wasn’t as big as its worst drop during the financial crisis.
The market’s sharp drop began on Friday as investors worried that creeping signs of higher inflation might push the U.S. Federal Reserve to raise interest rates more quickly, which could slow down economic growth by making it more expensive for people and businesses to borrow money.
“I look at the broader factors that are driving this sell-off, and it’s really the pick-up in interest rates that seems to be at the heart of the anxiety in the marketplace,” said Craig Fehr, a Canadian markets strategist at Edward Jones in St. Louis.
“And I look at a driver like that — and to the extent that interest rates are rising because economic optimism is picking up and that’s stoking some concerns about rising inflation — that for me is a healthy backbone for the fundamentals.”
“That means, in my opinion, this sell-off, while certainly aggressive, is probably likely to prove more temporary than to be a harbinger of an imminent bear market,” Fehr said.
“Any pullback that’s driven by increasing optimism, that’s a buying opportunity.”
North of the border, Canada’s largest stock market also experience a sharp drop Monday.
On the Toronto Stock Exchange, the S&P/TSX composite index was down 271.22 points to 15,334.81 in a broad-based decline that saw all sectors finish in the red.
Stocks in Europe also fell Monday, as Britain’s FTSE 100 lost 1.5 per cent while France’s CAC 40 slid 1.5 per cent. The DAX in Germany shed 0.8 per cent.
Japan’s benchmark Nikkei 225 tumbled 2.6 per cent and the South Korean Kospi shed 1.3 per cent. Hong Kong’s Hang Seng index sank 1.1 per cent.
In New York, selling accelerated shortly after 3 p.m. with the Dow sinking more than 800 points in a matter of 15 minutes only to snap back. The blue-chip index’s slide was its steepest since August 2011, and is also lower for the year. The Cboe Volatility Index more than doubled to its highest level in 21/2 years.
Treasuries popped, sending the 10-year yield down more than 10 basis points, and gold future pushed higher. The dollar stabilized while the yen advanced.
While Friday ’s market rout came amid U.S. wage data on Friday that pointed to quickening inflation, which would lead to higher rates and, in turn, rising borrowing costs for companies, the selling Monday came amid few major data points.
“I think sentiment was a little too optimistic,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.
“What was driving the market up in January? It wasn’t the fundamentals, as good as they were, it was excessive confidence.”
Elsewhere, oil extended declines after U.S. explorers raised the number of rigs drilling for crude to the most since August. Copper climbed the most in a week. Bitcoin slid below US$7,000.
This sell-off, while certainly aggressive, is probably likely to prove more temporary than to be a harbinger of an imminent bear market.