Dow stages huge comeback after a scary start
Another dramatic day on Wall Street: Stocks nosedived, then they soared.
The Dow declined 567 points at the open on Tuesday and briefly sank into correction territory — a drop of 10% from its record high. But those losses quickly vanished, and the index was up more than 500 points in the final hour of trading.
The huge swing — 1,080 points — shows how volatile trading has become in what was once a calm and booming stock market.
“We had an extreme sell-off followed by an extreme bounce,” said Peter Kenny, an independent market strategist and founder of Kenny’s Commentary. “It was a massive reversal: Nearly 1,000 points on the Dow is mind-bending.”
Kenny said that large investors probably led the rebound, picking up beaten-down stocks when the Dow entered correction territory.
The losses just after the opening bell raised the possibility that the Dow would close in a correction for the first time in two years. By late afternoon, it was well out of correction territory.
The stock market freakout of 2018 hit a crescendo on Monday when the Dow plunged a record 1,175 points. The 4.6% plunge was the index’s worst day since August 2011 and knocked it into the red for the year.
“There’s been a seismic shift in sentiment, which had reached extreme levels,” said Paul Hickey, co-founder of Bespoke Investment Group. “When people view the stock market as an ATM machine, the market is going to fight back.”
David Kotok, co-founder of Cumberland Advisors, called it a “wild rollercoaster ride.” He said that when Dow futures plunged 1,000 points overnight, it amounted to “climactic panic selling” that could signal a bottom for the market.
On Capitol Hill, Treasury Secretary Steven Mnuchin reminded lawmakers that the stock market is up 30% since President Trump’s election. He said the administration is focused on recently enacted policies like tax cuts as a driver of economic growth in the long run.
“The stock market has been functioning very well, and we continue to believe in the long-term impact of the stock market,” Mnuchin said before the House Financial Services Committee.
The tremors on Wall Street spread around the globe. Stocks in Europe and Asia posted heavy losses.
Major markets in Europe shed roughly 2%, and stocks in Germany, Sweden and Spain fell into a correction. Japan’s Nikkei nosedived 4.7%, while Hong Kong’s Hang Seng suffered a loss of 5.1%.
“We can all admit that the market went parabolic in the first 4 weeks of 2018 and we’re just back to square one,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a report on Tuesday.
After months of unusual calm, fear has raced back onto Wall Street in dramatic fashion.
The VIX index of market volatility spiked by a record 116% on Monday, to the highest level in more than two years. It ripped higher again Tuesday, then calmed down. Near the end of the day the VIX was down more than 20%.
One factor helping the stock market: The bond market has calmed down. The 10-year Treasury yield spiked to a four-year high of 2.85% in recent days because of worries about inflation. But it receded significantly on Tuesday, to 2.75%.
That’s a relief because investors have become concerned that the era of extremely low interest rates that propped up stock prices for years may soon be over. The fear is that the U.S. economy could overheat, forcing the Federal Reserve to aggressively raise interest rates. That could take a lot of air out of the stock market.
“There is concern that it won’t take much of a rise in interest rates to create havoc,” said Ed Yardeni, president of the investment advisory firm Yardeni Research. “2008 spooked us all. Very few people understood that credit markets can create a domino effect worldwide.”
Despite the heavy selling, the Dow is still up significantly since President Trump’s election. But that’s down significantly from the 8,000-point gain it was showing a few weeks ago.
It’s becoming clear stocks ran up too far, too fast in the euphoria over Trump’s tax cuts and the improving economy. The U.S. unemployment rate is sitting at 17-year lows and global growth has gained momentum.
“The tax cut euphoria drove stocks up at an unsustainable pace,” Scott Minerd, global chief investment officer at Guggenheim Partners, wrote in a research note. But concerns about oversupply in the bond market and higher interest rates have been growing, he added.
Market analysts have long been saying the market was overdue for a cooling-down period. The question now is how far stocks will retreat before investors feel emboldened to start buying again.
“This correction is a healthy development for the markets in the long run, and the equity bull market, while bloodied, is not broken,” Minerd said.
Yardeni agrees, pointing to the strength of the economy and corporate profits.
“The fundamentals are great. Earnings have been on fire,” he said. “I’m still bullish.”