This is why the Dow is plunging

Stocks were pummeled on Friday and Monday. The ...

Posted: Feb 6, 2018 10:03 AM
Updated: Feb 6, 2018 10:03 AM

Stocks were pummeled on Friday and Monday. The Dow fell more than 1,800 points over two sessions. Here's what's going on.

1. Concerns that the Fed will raise rates

Stocks have been rising steadily since the election in part because the economy is so strong. Unemployment is historically low, and there are more open jobs than people to fill them.

Companies are starting to pay workers more to retain existing employees and attract new hires. Businesses will eventually have to raise prices on the stuff they sell to afford their growing payrolls. In economics, that's called inflation.

Though the economy has been growing steadily for almost nine years, inflation has remained stubbornly and mysteriously low. The Federal Reserve combats inflation by raising its interest rates. The central bank has been unable to significantly raise its interest rates over the past decade, fearing it could stymie the economic recovery and perhaps cause prices to fall.

The Fed planned on raising interest rates slowly this year -- just three times in 2018. But if inflation picks up, the Fed could raise rates more often and more steeply than it had planned.

2. Rising interest rates

When the Fed raises rates, the cost of borrowing money increases. That means companies have to pay more for their loans, which cuts into corporate profits. It also means Americans will pay more for mortgages and loans.

Another reason the stock market has risen so much over the past year has been the steady growth in corporate profits. Companies are healthy, and investors have rewarded them by pushing up their stock prices.

When interest rates rise sharply, stocks often fall. Investors worry that businesses' profit parade will slow down.

3. Worries about the bond market

Stocks have also been on a tear because they have been one of the only investments with a decent return. U.S. Treasury bond yields have been so low that many stock dividends are paying better.

But stocks are a higher-risk investment than bonds, which are backed by the United States Treasury. If bond yields start to rise, investors will want to take some of their money out of stocks and put it into safer bonds.

Sure enough, bond yields hit a four-year high Friday. (They pulled back a bit on Monday.) The recent tax bill has forced the Treasury to borrow more money, which will put more bonds into play. A supply glut could devalue bonds. Prices and yields move in opposite directions, and bond buyers will want a higher yield (and lower price) to make it worth their investment.

Inflation is bad for bonds, too. If borrowing costs increase, bond investors will want more return -- a higher yield.

Attractive yields on a safer investment have made stocks suddenly less attractive.

4. Too far, too fast

Stocks have been rising pretty much in a straight line since November 2016, and that's not exactly healthy. Stock market analysts believe the stock market is long overdue for a 5% pullback or even a 10% correction.

A cooling-off period would be a good thing. It would make stocks cheaper and more attractive to investors, especially if the underlying companies are healthy, cranking out strong sales and profits.

The market finally began to come down to earth -- just a bit -- this week, and investors wonder whether this is the beginning of a correction. There could be a little groupthink taking place in the downturn.

Huntsville
Cloudy
55° wxIcon
Hi: 70° Lo: 52°
Feels Like: 55°
Florence
Cloudy
58° wxIcon
Hi: 68° Lo: 51°
Feels Like: 58°
Fayetteville
Cloudy
55° wxIcon
Hi: 69° Lo: 48°
Feels Like: 55°
Decatur
Cloudy
55° wxIcon
Hi: 70° Lo: 53°
Feels Like: 55°
Scottsboro
Cloudy
58° wxIcon
Hi: 69° Lo: 54°
Feels Like: 58°
WAAY Radar
WAAY WAAY-TV Cam
WAAY Temperatures

 

Alabama Coronavirus Cases

Cases: 531094

Reported Deaths: 10978
CountyCasesDeaths
Jefferson765441522
Mobile40979804
Madison34763503
Tuscaloosa25781452
Montgomery24331589
Shelby23431249
Baldwin21135308
Lee15886171
Calhoun14505314
Morgan14300279
Etowah13834353
Marshall12222223
Houston10571281
Elmore10061205
Limestone9964151
Cullman9670193
St. Clair9657243
Lauderdale9428241
DeKalb8831186
Talladega8223176
Walker7236277
Autauga6920108
Jackson6813112
Blount6661137
Colbert6301134
Coffee5512119
Dale4831111
Russell441238
Chilton4294112
Franklin425682
Covington4121118
Tallapoosa4029152
Escambia393476
Chambers3563123
Dallas3551151
Clarke351061
Marion3119101
Pike310877
Lawrence300298
Winston274472
Bibb260764
Geneva250077
Marengo249764
Pickens234461
Barbour230857
Hale222977
Butler215969
Fayette212462
Henry188744
Cherokee184945
Randolph180241
Monroe177440
Washington167339
Macon159250
Clay156256
Crenshaw152357
Cleburne148941
Lamar142535
Lowndes138853
Wilcox127130
Bullock123041
Conecuh110529
Perry107726
Coosa107228
Sumter104532
Greene92334
Choctaw60624
Out of AL00
Unassigned00

Tennessee Coronavirus Cases

Cases: 854360

Reported Deaths: 12276
CountyCasesDeaths
Shelby959681622
Davidson89465938
Knox50796635
Hamilton44378495
Rutherford43100435
Williamson28040217
Sumner24052349
Montgomery20315227
Wilson18838235
Out of TN1842298
Unassigned17005134
Sullivan16846295
Blount15513193
Bradley15062150
Washington14623245
Maury13517172
Sevier13408175
Putnam11398175
Madison11185242
Robertson9768131
Anderson8768172
Hamblen8616173
Greene7889156
Tipton7371102
Coffee6911122
Dickson6841112
Cumberland6748133
Carter6639158
Gibson6533146
McMinn651898
Bedford6512129
Roane6302105
Jefferson6222124
Loudon614069
Hawkins6110107
Lawrence595387
Monroe585595
Warren554681
Dyer5429106
Franklin515490
Fayette509076
Cheatham455856
Obion454196
Cocke451199
Lincoln436663
Rhea435375
Marshall419958
Campbell415763
Weakley414765
Giles3999100
Henderson379576
White366070
Carroll362283
Macon362278
Hardin357868
Hardeman352964
Lauderdale319644
Henry319376
Claiborne318173
Scott313645
Marion312847
Overton301661
Wayne296234
Hickman284446
McNairy282554
DeKalb280354
Smith277939
Haywood271462
Grainger263050
Morgan250239
Trousdale250222
Fentress242347
Johnson240939
Chester214851
Bledsoe214611
Polk208224
Unicoi204249
Crockett203248
Cannon192331
Union190734
Humphreys180327
Grundy179334
Lake170426
Sequatchie170229
Benton166740
Decatur158939
Lewis158226
Meigs139025
Stewart132528
Jackson132336
Clay110331
Houston109533
Perry106728
Moore101217
Van Buren84823
Pickett76024
Hancock59112

Community Events