Why stocks are suddenly plunging

Just a week ago the Dow was on the cusp of cruising above 27,000 for the first time. Now, it's in a scary ta...

Posted: Oct 11, 2018 9:47 AM
Updated: Oct 11, 2018 9:47 AM

Just a week ago the Dow was on the cusp of cruising above 27,000 for the first time. Now, it's in a scary tailspin.

The sudden sell-off can be explained in large part by looking at the bond market. Simply put, stocks are sinking as Treasury rates spike.

Banking, finance and investments

Business, economy and trade

Company activities and management

Company earnings

Continents and regions

Economy and economic indicators

Financial markets and investing

Financial performance and reports

Financial results

Government and public administration

Government organizations - US

North America

Public finance

Securities trading

Stock markets

Taxes and taxation

The Americas

The Fed

United States

US federal departments and agencies

US government independent agencies

Economic policy

Interest rates

Monetary policy

Economic conditions

Economic indicators

Inflation

The Dow plunged 832 points, or 3.2%, on Wednesday. Tech stocks took a beating, sending the Nasdaq tumbling 4% — its worst day since the Brexit referendum of June 2016. Even Amazon (AMZN) dropped 6%.

1. Interest rates are rising

Over the past decade, Wall Street became addicted to easy money. Unbelievably low interest rates from the Federal Reserve encouraged investors to take risk by piling into stocks. Lower borrowing costs meant higher corporate profits.

That trend is now reversing, albeit for mostly good reasons: The American economy is really strong, and the Fed is raising rates to keep inflation in check and make sure the economy doesn't overheat.

It's a huge positive the Federal Reserve is no longer propping up the economy with near-zero rates. The Fed has raised interest rates eight times since late 2015. The central bank has even begun to shrink its $4.5 trillion balance sheet.

As interest rates rise, investors have been getting out of bonds, driving down their price and driving up their yields. Investors are worried that their investments will be less profitable over time if inflation picks up.

The 10-year Treasury yield hit 3.24% on Wednesday for the first time in seven years. That's an about-face from 2.85% at the end of August.

2. The Fed is sticking to its guns

Stocks tend to slump after rapid rate spikes. Suddenly, stocks are getting competition from boring bonds.

Investors can now get a decent return from an ultra-safe government bond. That makes expensive tech stocks look like more of a gamble. Facebook (FB), Netflix (NFLX) and Twitter (TWTR) all fell sharply on Wednesday.

If anything, the market turmoil reflects concerns that the economy could grow too fast, forcing the Fed to move aggressively to snuff out inflation. Last Friday's jobs report showed the US unemployment rate plunged in September to a 49-year low. Wage growth, the biggest driver of inflation, has finally showed signs of life.

Fed chief Jerome Powell reinforced these worries last week by suggesting the Fed has a "long way" to go in its quest to return rates to normal levels. Powell said rates are not close to "neutral," the level where the Fed is neither hitting the gas nor the brakes on the economy.

In other words, it's full steam ahead for the Fed. Some investors — and even President Donald Trump — worry the Fed could be moving too quickly.

"I think the Fed is making a mistake," Trump told reporters in Pennsylvania on Wednesday. "They're so tight. I think the Fed has gone crazy."

3. Investors are worried about debt and China

Rising rates may already be pinching parts of the US economy, particularly housing and the auto market.

Rates are also going up because the US government is selling more Treasuries to pay for the soaring federal deficit. Washington is borrowing heavily to pay for the corporate tax cut and a surge of government spending.

The good news is that Corporate America is minting money right now. Third-quarter S&P 500 earnings are projected to soar by 20%. Strong profits could very well ease investor anxiety. That's what happened earlier this year when Treasury rates spiked, briefly spooking the market before cooler heads prevailed.

The major difference is that corporate profits are expected to decelerate next year as the impact of the tax cuts fades. Record-high profits could get dinged by rising borrowing costs, wages and prices for raw material.

And then there's the trade war between China and the United States — the world's two largest economies.

The tit-for-tat tariffs threaten to hurt business confidence and delay investment. Citing the trade war, the IMF on Monday cut its 2019 growth forecasts for the US and China. That won't help jittery investors.

Click to Submit Photo

 

 

Huntsville
Overcast
63° wxIcon
Hi: 69° Lo: 58°
Feels Like: 63°
Florence
Overcast
62° wxIcon
Hi: 67° Lo: 57°
Feels Like: 62°
Fayetteville
Overcast
63° wxIcon
Hi: 70° Lo: 58°
Feels Like: 63°
Decatur
Overcast
63° wxIcon
Hi: 67° Lo: 57°
Feels Like: 63°
Scottsboro
Overcast
66° wxIcon
Hi: 71° Lo: 62°
Feels Like: 66°
WAAY Radar
WAAY WAAY-TV Cam
WAAY Temperatures

Alabama Coronavirus Cases

Confirmed Cases: 155915

Reported Deaths: 2674
CountyConfirmedDeaths
Jefferson23129377
Mobile16849315
Tuscaloosa10296140
Montgomery10197197
Madison928096
Shelby733863
Baldwin663769
Lee653465
Calhoun456761
Marshall438150
Etowah426551
Houston414834
Morgan412035
DeKalb338829
Elmore320053
St. Clair292542
Limestone284230
Walker277292
Talladega265335
Cullman244024
Lauderdale226242
Jackson214915
Franklin205231
Autauga204831
Colbert200532
Russell19443
Blount192525
Chilton186932
Dallas186527
Coffee176311
Dale175151
Covington174029
Escambia172530
Chambers135044
Clarke134317
Pike133513
Tallapoosa131787
Marion107629
Barbour10319
Marengo100822
Butler100740
Winston92213
Geneva9007
Lawrence85032
Pickens84718
Bibb82814
Randolph82316
Hale76730
Washington74412
Clay74112
Cherokee73314
Lowndes70928
Henry7086
Bullock64817
Monroe64610
Crenshaw60630
Perry5896
Fayette57413
Wilcox56712
Conecuh56113
Cleburne5568
Macon53420
Lamar4905
Sumter47221
Choctaw39012
Greene34216
Coosa2033
Out of AL00
Unassigned00

Tennessee Coronavirus Cases

Confirmed Cases: 244087

Reported Deaths: 3100
CountyConfirmedDeaths
Shelby35753562
Davidson31206336
Knox1256189
Hamilton11618108
Rutherford11611112
Williamson697156
Sumner5948109
Wilson462956
Putnam440356
Montgomery411555
Out of TN389635
Madison374079
Sullivan365346
Bradley355823
Washington338850
Sevier332821
Blount330936
Maury321837
Unassigned29539
Robertson258941
Hamblen244548
Tipton232222
Dyer218930
Gibson213043
Hardeman186433
Coffee185323
Trousdale17687
Obion174121
Greene168451
Bedford168120
Fayette166723
Anderson166614
Dickson164819
McMinn161535
Loudon161211
Cumberland159525
Wayne15917
Lawrence158719
Jefferson153720
Carter152932
Weakley152325
Monroe144328
Warren142510
Lauderdale142317
Henderson140226
Hardin137919
Macon132425
Roane12857
Franklin127819
Haywood127227
Overton121316
Hawkins118825
White117514
Johnson11327
Carroll113025
Marshall11269
McNairy111227
Rhea109317
Cheatham104111
Cocke103514
Bledsoe10114
Campbell100011
Smith98413
Lake9833
Giles95135
Fentress90811
Lincoln8803
Crockett83320
Henry78110
Hickman77915
Marion7479
Chester72514
DeKalb72517
Decatur65511
Grainger6034
Grundy55311
Union5383
Claiborne5186
Polk50313
Jackson4525
Humphreys4404
Morgan4357
Benton4139
Houston40917
Cannon4082
Unicoi4043
Clay40113
Lewis3852
Scott3745
Sequatchie3422
Stewart32010
Meigs3076
Perry2912
Pickett2727
Moore2652
Van Buren2051
Hancock1173

Community Events