Investment pros stay calm after rate fears clobber stocks
The stock market has finally found something to fear.
For more than a year, investors have brushed off bombastic talk about nuclear war, dysfunction on Capitol Hill and other worrisome situations. The Dow Jones industrial average and the Standard & Poor’s 500 glided to record after record, with few hiccups.
Last week, the calm cracked. The stock market finally got spooked by an ongoing sell-off in bonds. As bond prices fall, their yields go up, a signal of rising interest rates. Low interest rates have been an underpinning of the current bull market in stocks, now in its ninth year.
On Friday, the rate on the 10-year Treasury note jumped to a four-year high. The Dow and S&P 500 each lost around 4 percent, their worst week since January 2016. On Friday, the Dow dropped 665 points, or 2.5 percent. Some earnings-related selling in big names such as Apple and Exxon Mobil added to the swoon.
Some investors believe the market can recover, noting that both global economic growth and corporate earnings remain strong. One hallmark of this bull market has been investors’ willingness to buy the dips. This week’s drop could test their resolve.
Since the Great Recession, ultra-low interest rates have made it easier for businesses and companies to borrow. They also have pushed investors into buying stocks by minimizing the interest payments from bonds.
Rates were due to rise, and investors cast a wary eye on the 10-year Treasury as it rose earlier this year. Those concerns hit a high point Friday after a U.S. government report said wages last month rose at the fastest pace in eight years.
Bigger paychecks are a welcome sight for workers, but can also signal that inflation is about to pick up across the economy. Inflation has been relatively dormant since the recession. This week, the Federal Reserve said it expects inflation to finally pick up this year.
The Fed could raise interest rates more quickly than investors are prepared for if inflation accelerates at too fast a pace. That could further upset markets, which have seen an unusual lack of volatility for more than a year. After Friday’s jobs report, some economists raised their forecast for Fed rate increases this year to four from three.
“We are rapidly approaching the point at which low rates will no longer provide support to the equity market,” said Eric Winograd, senior U.S. economist at AllianceBernstein.
Those concerns echoed worldwide. Other markets around the world were similarly weak as interest rates climbed.