The continuing sell-off in bonds is, according to insiders on Wall Street, spooking the market.
While low interest rates have been the basis of the nine-year-long bull market in stocks, falling bond prices and rising yields augur higher interest rates.
The recent Trump tax cuts may, some fear, come with a downside. Large take-home pay could mean that inflation, not a real concern since the recession, is about to rise. The Federal Reserve issued a statement saying about just that.
Greg McBride, chief financial analyst at Bankrate.com, told the Vois Es Nais web site: “Markets go up and down, not just up.” Added Eric Winograd, senior U.S. economist at Alliance Bernstein, “We are rapidly approaching the point at which low rates will no longer provide support to the equity market.”
On February 2, the 10-year Treasury note’s rate rose to its highest mark since 2014. Both the Dow and S&P 500 lost approximately 4% of their value, the Dow dropped 665 points, or 2.5 percent. And then on Monday, February 5, U.S. stocks plunged in highly volatile trading, with both the S&P 500 and Dow Industrials indices slumping more than 4.0 percent. The Dow, Reuters reported, notched “its biggest intraday decline in history with a nearly 1,600-point drop and Wall Street erased its gains for the year.”
Indeed, the pace of the afternoon equity sell-off in New York “raised suspicions that investors had been forced to unwind positions in haste,” FT noted. “At one point, the Dow Jones Industrial Average shed more than 800 points in 10 minutes, taking the measure down as much as 1,600 points. Trading volume was the second highest this decade.”
“The speed of this is like a flash crash at the end of the trading day,” Jim Paulsen, strategist at Leuthold Investment Management, told FT. “Either there are quantitative trades that are automatic, or someone got caught awfully wrong.”
In reporting that the S&P 500 “had its worst week of losses in two years,” Quartz Media noted that “the selloff is spreading around the world. Japan’s Nikkei 225 index fell 2.55% on Monday, the biggest drop in 14 months. European stocks followed suit, with most big indexes down at least 1% this morning. As of now, the Euro Stoxx 600 and Nikkei 225 indexes have each erased all the gains they’d made so far this year.”
J.P. Morgan, however, wasn’t quite as rattled, calling the sell-off in global equities and sovereign debt more than likely an overdue correction rather than a response to trepidation over inflation.
Never let it be said that Wall Street doesn’t hedge its bets. As the Journal predicted on Tuesday, “The selloff feeds two narratives — one involving a brief correction, the other a tale of woe for stock and bond investors.”
By: Kenneth H.R. Robeson