1,033-point drop sends Dow into ‘correction’
‘Tsunami’ of a sell-off is second-worst ever
The Dow Jones industrial average plunged 1,033 points Thursday, its second-worst one-day point drop in history, extending its losses this week to more than 10% and putting it officially into correction territory for the first time since early 2016.
The blue-chip stock average’s drubbing has been fueled by fears that a long period of low interest rates and tame inflation that have boosted the economy and fueled the rapid rise in stock prices for years may be coming to an end as economic conditions improve.
“The Dow has been hit by a tsunami of volatility,” says 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.”
On Thursday, the yield on the 10year Treasury note again ticked up to a four-year high of 2.88%, sparking fears
that rates could hit the key 3% level.
Wall Street also has been hurt by a popular trade that has gone bad. It was a bet on low volatility in the market continuing. When volatility spiked, it resulted in steep losses, forcing investors that had a lot of money riding on the trade to sell, which exacerbated losses in the broader market.
Sparking the turbulence was a report last week showing that hourly wage growth rose at its fastest pace since 2009. The strong wage data sparked fears of coming wage inflation, which intensified worries that the Federal Reserve could increase rates more often this year than it has signaled.
“The market has undergone a psychological change,” says Doug Ramsey, chief investment officer at The Leuthold Group in Minneapolis.
Although Wall Street has been calling for a correction given the market’s euphoric rise, the fall has been more violent and quicker than expected.
“The market has undergone a psychological change.”
Doug Ramsey Chief investment officer, The Leuthold Group