(B) The Dow’s highest closing record was 26,616.71 set on January 26, 2018. On Friday, the Dow fell by 666 points and dropped below 25,000. Today, Monday, it fell briefly by 1,600 points and ended the day dropping by 1,175 reaching 24,345. Today Dow’s nearly 1,600 point plunge marks its biggest intraday point drop ever. The previous biggest intraday point drop was 1,000 on August 25, 2015 (for more on that day, please read: Dow Down 1000 this Morning – Fundamentals Valuations and Psychology, A Silicon Valley Insider).
So what is happening? Well, bonds yields are spiking due to higher inflation expectations. The 10-year treasury yield moved from 2.46 on 1/4/18 to 2.84 on 2/2/18. So as a result, asset prices are being re-evaluated since the Federal Reserve could be tightening much more than previously priced in the market.
To deeper dive…
“Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets. The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening. In other words, fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy. This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right. This is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.”
Last week, Professor Jeremy Siegel, gave his own views on the market in an interview to CNBC. He cited the Labor Department’s jobs report as the main culprit in the Dow Jones industrial average’s 666 point drop on Friday:
“I think what happened today (Friday, February 2nd, 2018) was an interest rate effect. When I saw at 8:30 that wage (increase) year over year hitting a nine-year high, I said, Wow, we’re probably going to get four interest rate hikes, we’re going to see the 10-year probably go to 3%.”
Wall Street Veteran’s Art Cashin in an interview today to CNBC “called the Dow’s steep plunge “totally ridiculous” and noted it was on moderate volume. However, when the market started looking like it was getting out of control, people begin to get fearful. The fear builds on itself.”
Note: The picture above is two angels smiling.
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Categories: Financial Markets