2-3-18 2:47 AM EST | Email Article

Dow drops 4.1% in week, bond yields climb

By Corrie Driebusch, Riva Gold and Daniel Kruger 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 3, 2018).

A rare burst of volatility jolted financial markets and sent stocks and bonds tumbling Friday, a sharp shift from the tranquility that has characterized much of the nearly nine-year bull-market run.

The Dow Jones Industrial Average dropped 2.5%, its biggest one-day decline since the U.K.'s surprise vote to leave the European Union in June 2016. Meanwhile, the yield on the benchmark 10-year Treasury note climbed to 2.852%, its highest level since January 2014.

Bond investors have started to take the threat of inflation more seriously, and an anticipated rise in interest rates spooked stock investors. When yields go up, it costs companies more to borrow money and can trigger fears that the Federal Reserve may need to raise interest rates more quickly to keep up with inflation.

For most of the current bull market, easy money policies had pushed investors away from the paltry returns offered by government debt and into stocks. Investors continued buying shares, even after some analysts began to warn they were looking relatively pricey compared with historical averages.

Now, the fear is that the past week's selloff -- the Dow posted a 4.1% decline, its biggest weekly drop since January 2016 -- could mark the start of a more tumultuous period in markets.

"People are questioning the conditioning that every dip will be bought," said Mohamed El-Erian, chief economic adviser at Allianz, referring to both the bond and stock markets. He added the global economy continues to be strong, but he expects this pickup in gyrations to continue.

Still, many investors and analysts embraced the newfound volatility, calling it healthy after the swift -- and likely unsustainable -- stock-market rise that ushered in the New Year. The Dow rose 5.8% in January as strong economic and corporate-earnings growth invigorated investors, who poured $100 billion into equity funds in January, their biggest monthly inflow on record, according to fund-tracker EPFR Global.

"Do I think stocks will continue to rise at their same pace? Absolutely not," said Kate Warne, investment strategist for retail brokerage Edward Jones. "I think stocks will continue to rise, but it'll be a much more volatile ride."

The Dow posted two moves of at least 1% in the past week, compared with 10 in all of 2017. The CBOE Volatility Index, which measures expected stock swings over the next month, on Friday notched its highest close since November 2016, when jitters around the U.S. presidential election escalated.

The recent volatility continued Friday following the January jobs report. Wage growth accelerated, rising 2.9% over the past year, the strongest year-over-year gain since June 2009, according to the Labor Department. Government-bond yields rose as investors interpreted the wage gains as a sign the tightening labor market may finally trigger higher inflation. Yields rise as bond prices fall.

The Dow fell 665.75 points to 25520.96 Friday, its biggest one-day point drop since December 2008. For the week, the blue-chip index fell nearly 1100 points, the most since the throes of the financial crisis in October 2008.

Although the magnitude of the falls were much greater a decade ago when the Dow traded around 8000 points, Friday's swift drop still took many traders, analysts and investors by surprise.

The S&P 500 lost 59.85 points, or 2.1%, to 2762.13 and the Nasdaq Composite dropped 144.92, or 2%, to 7240.95. All three indexes remain higher in 2018, with the Dow and S&P 500 up more than 3% and the Nasdaq up 4.9%.

Some traders said the dour mood around stocks and bonds was amplified by Friday's political developments. House Republicans released a memo alleging surveillance abuses by the Federal Bureau of Investigation during its Russia probe.

Still, many other investors said the stock market is likely to remain strong due to a brightening earnings picture. Analysts' projections for U.S. earnings in 2018 have been upgraded significantly over the past month following changes to the U.S. tax code, while results for the fourth quarter have largely exceeded analysts' expectations.

"I don't see much panic out there," said David Kelly, chief global strategist at J.P. Morgan Asset Management. The real danger for stocks isn't Treasury yields climbing above 3%, but a recession, he said, adding that as long as central banks maintain their slow and steady pace of rate increases and corporate earnings remain solid, he doesn't foresee a recession in the near future.

Corporate results drove many of Friday's biggest share moves. Earnings from U.S. technology giants late Thursday were mixed. Shares of Amazon.com climbed $39.95, or 2.9%, $1,429.95 after its quarterly profit topped $1 billion for the first time. Apple shares fell $7.28, or 4.3%, to $160.50 after reporting a slight drop in iPhone sales but overall beating expectations. Google parent Alphabet dropped $62.39, or 5.3%, to $1,119.20 after posting weaker-than-expected earnings, even when stripping out a big one-time tax hit.

Exxon Mobil and Chevron helped drag down the Dow, taking 79 points off the index, after reporting profits that missed expectations, despite the recent rally in crude prices.

In Europe, shares of Deutsche Bank fell 6.2% after it reported a sizable loss for the fourth quarter and its third consecutive full-year loss. The Stoxx Europe 600 fell 1.4%, ending the week down 3.1%, its biggest fall since February 2016. Meanwhile, major stock indexes in China, South Korea and Japan all ended the week down more than 1%.

Although stocks globally suffered large declines, some analysts and investors emphasized that it isn't the pullback that should be viewed as unusual, but the steady climb higher since early 2016.

"This moment was inevitable in many ways," said Jurrien Timmer, director of global macro at Fidelity Investments. "This week's decline doesn't feel good, but it's good the stock market is listening to the bond market."

Write to Corrie Driebusch at corrie.driebusch@wsj.com, Riva Gold at riva.gold@wsj.com and Daniel Kruger at Daniel.Kruger@wsj.com

 

(END) Dow Jones Newswires

February 03, 2018 02:47 ET (07:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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