Dow absorbs biggest 2-day drop since 2016

Don’t panic, Wall Street watchers say, it’s natural

Just when the U.S. stock market looked as if it would keep going up forever, the biggest two-day drop for the Dow since the middle of 2016 put onceebullient investors on edge.

The Dow Jones industrial average, which had been riding a wave of investor optimism to fresh records almost every day, has come under the heaviest pressure since the Brexit vote in June 2016 rocked markets.

Suddenly cautious investors are reevaluating the market’s prospects as challenges such as rising interest rates and dangerously high levels of investor confidence pose risks for stocks.

Indeed, a market calm that stretches back more than a year was shattered Tuesday after the Dow briefly fell more than 400 points, ending the day down nearly 363 points, or 1.4%, at 26,076.89.

The Dow’s two-day drop of 540 points represents its first major setback since rallying 25.1% in 2017 and tacking on 1,900 points in the first 18 trading days of the year, when it hit 11 record highs. That start to 2018 was fueled by strong global growth, a businessfriendly White House and improving corporate profits boosted by tax cuts.

The main catalysts for the drop this week were investors’ opting to lock in profits after the big early-year rally and a sharp rise in long-term interest rates.

The yield on the 10-year Treasury note jumped as high as 2.74% Tuesday, its highest since April 22, 2014. Wall Street is worried that higher borrowing costs could slow economic growth.

Also weighing on stocks was news that Amazon, Berkshire Hathaway and

J.P. Morgan, are teaming up to create an independent company whose goal is to lower the cost of health care for its workers. The threat of potential disruption in the health care industry caused a sell-off in those stocks.

Despite the losses, Wall Street pros aren’t saying the nearly nine-year bull market is over. They stress that the market, which has not suffered a 5% drop, or a “pullback,” in 19 months, was vulnerable to a drop.

Joseph Quinlan, chief market strategist at U.S. Trust, called the swift decline a “much-needed midwinter pause after the lightning-bolt-like performance of stocks” in January.

Though rising bond yields have been one catalyst for the decline, Quinlan emphasized that rising borrowing costs are actually a sign of “robust economic growth,” which is a positive backdrop for stocks.

Barry Bannister, a market strategist at money management firm Stifel, tells clients he expects a 5% drop for stocks in the first quarter of 2018, citing challenges from rising interest rates.

The two-day rout on Wall Street needs to be put into context, given the Dow’s early-year surge that pushed it up nearly 8%, says Chris Zaccarelli, chief investment officer at Independent Advisor Alli- ance, a money-management firm in Charlotte.

“Markets have been overheated this month, and even with larger drops like we saw Tuesday, we still remain on pace to have one of the strongest starts to a year in decades,” Zaccarelli says.

Indeed, the Dow is up 5.5% this year despite its tumbles.

Citing a U.S. economy that remains strong and robust corporate profits, Zaccarelli says a bear market, or drop of 20%, is not part of his forecast.

Investors, he says, “should stay patient as market pullbacks are normal.” He stresses that none of the warning signs that typically signal major trouble for stocks — such as a recession — is present.