Dow downer
Interest rate rise sparks fear that economic expansion will slow
Stocks suffered an 800-point drop, its steepest in eight months, as rising interest rates made investors jittery and tensions with China hit tech shares.
The Dow dropped more than 800 points in one of the worst sell-offs since February as investors worried that sharply rising rates would constrain the nation’s historic economic expansion.
Higher interest rates tend to moderate economic growth and makes borrowing more expensive for the U.S. government as well as businesses and consumers. The 10-year U.S. Treasury, a key benchmark for rates, has been spiking and is now at 3.2 percent, one of its highest levels since just after the Great Recession. Rates on many types of loans, such as those for mortgages and cars, tend to be tied to the government bond.
Traders rushed out of stocks that have been driving the economy, namely big tech. Netflix was down more than 8 percent, Amazon was off 6 percent and Apple and Google were both down more than 4.5 percent. Meanwhile safe bets, such as utilities and consumer staples, were the only positive notes in the sell-off.
“Clearly stocks are spooked by higher rates and maybe some inflation that seems to be creeping in,” said Michael Farr, CEO of Farr, Miller & Washington. “That suggests the Fed will keep raising rates, and that’s taking the wind out of the stocks that have done the most, particularly in the tech sector.”
The Dow Jones industrial average dropped 3.1 percent, or 831 points, to land at 25,599. The S&P 500 was down 3.3 percent, and the Nasdaq saw losses of 4.1 percent. The Standard and Poor’s 500-stock index hit its longest losing streak in two years.
Larry Benedict, founder of the Opportunistic Trader, said that even while some of the largest names in tech — including Netflix, Amazon, Google and Facebook — saw some of the steepest dips, they are all up significantly for the year. Netflix, for example, is still up more than 60 percent for the year, and Amazon is up nearly 50 percent.
“Yes, they’re down, but they’re definitely the best performers,” Benedict said.
The yield on the 10-year U.S. Treasury note is a closely watched number as a signal of where the U.S. economy is headed. The yield — what it pays its owner for buying it — climbed above 3 percent in April. Many observers expected that would trigger a sell-off in the stock market as investors flooded their cash into Treasurys. Instead, U.S. equity markets have kept going up.
Investors are leaning into safer stocks with steady dividends — utilities and consumer staples —
and pulling out of the higher-paying, higher-risk stocks as other guideposts of growth, like the communication sector, tumbled.
The markets have been on a historic climb — with the Dow and S&P each notching dozens of new highs since 2016 — buoyed by a strong U.S. economy and solid corporate earnings.
On Friday, federal data showed that the U.S. jobless rate fell to 3.7 percent in September, its lowest point since 1969. The Fed has predicted that unemployment will remain below 4 percent through 2020 and inflation is expected to track around 2 percent, conditions that Federal Reserve chief Jerome Powell called “remarkably positive.”
The current benchmark interest rate is 2 to 2.25 percent. The Fed aims to raise rates to about 3 percent.
President Donald Trump, who has claimed much of the credit for the strong economy, has criticized the Fed’s pace of raising interest rates, saying going too fast could slow growth and job creation.
“I think we don’t have to go as fast,” Trump said Tuesday on CNBC.
Ivan Feinseth, Chief Investment Officer at Tigress Financial Partners, said that although the sell-off caught him off-guard, he thought many investors were unduly frightened by the prospect of rising rates.
“I believe this selling is an overdone panic,” Feinseth said. “The Fed will stay on a measured pace. The Fed increasing rates to me was a sign that the economy was able to stand on its own two feet.”
As for whether Wednesday’s overall market drop could signal an end to broader economic growth, Benedict says there won’t necessarily be long-term affects if the markets can stabilize before the losses grow more severe.
“I stood on the floor in the crash of ’87, so this is nothing,” Benedict said. “It’s not a crash yet . ... This is just a down day, and we’ll look to reassess in a couple days to see where everything settles.”