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 10:47 AM
Updated: Oct 11, 2018 10:47 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.

New York Coronavirus Cases

County data is updated nightly.

Cases: 1323312

Reported Deaths: 42134
CountyCasesDeaths
Queens1651787958
Kings1622028176
Suffolk1340572677
Nassau1199332604
Bronx1105945327
Westchester884041836
New York791053490
Erie540971409
Richmond468611405
Monroe45706816
Rockland32948821
Orange30012661
Onondaga28797547
Dutchess17623336
Oneida17540369
Albany17287270
Niagara12718253
Broome11804270
Saratoga984289
Schenectady9131137
Ulster8129200
Rensselaer7349110
Putnam682476
Chautauqua594772
Chemung5782111
Oswego512375
Ontario490483
Steuben4740132
Cayuga465575
Sullivan399451
St. Lawrence393864
Herkimer389670
Wayne384556
Genesee3834102
Cattaraugus358162
Jefferson347629
Madison328876
Livingston284442
Tompkins281125
Cortland273855
Columbia269374
Allegany244275
Montgomery240078
Clinton236018
Tioga231354
Wyoming230344
Fulton229156
Warren224542
Greene217863
Orleans202471
Chenango188845
Otsego184324
Washington164427
Lewis161325
Seneca129847
Franklin12979
Delaware110027
Essex102521
Schoharie9606
Yates87522
Schuyler75110
Hamilton1611
Unassigned71110
Out of NY0168
Rome
Partly Cloudy
wxIcon
Hi: 17° Lo: 0°
Feels Like: 5°
Binghamton
Partly Cloudy
14° wxIcon
Hi: 18° Lo: 6°
Feels Like: 14°
Rome
Partly Cloudy
wxIcon
Hi: 19° Lo: 2°
Feels Like: 5°
Rome
Clear
wxIcon
Hi: 11° Lo: -9°
Feels Like: 5°
WKTV Radar
WKTV Temperatures
WKTV Severe Weather
2021 Golfer's Paradise Card - 21 Courses for only $99.99
Saluting Those Who Are Proud 2 Serve