Selling in the stock market intensified on Wall Street late Monday as the Dow cratered more than 600 points and sank below the 25,000 level, extending last week’s steep selloff.

In a wild trading session Monday the size of the Dow drop topped 600 points in afternoon trading after earlier recouping nearly all of its early-session loss of 355 points.

Following Friday’s 666-point plunge, the downdraft in stocks resumed Monday with the Dow Jones industrial average briefly going into freefall right after the opening bell. But an hour into the session, the Dow rallied back within 1 point of its break-even point for the day. The trend has been down ever since.

The selloff has been sparked by inflation fears and worries that interest rates could rise faster than expected. Those fears stem from a strong employment report released Friday that showed wage growth for hourly workers over the past year had risen nearly 3%, its quickest pace since 2009. 

“Stocks have retained their cautious tone to start the week,” notes David Rosenberg, chief economist and strategist at Gluskin Sheff, a Toronto-based money management firm.

Today’s selloff has pushed the Dow down more than 5% from a high for the first time since the Brexit vote in June 2016 — or 19 months ago. In contrast, since 1928 the market has suffered an average 3.4 annual drops of 5% or more, according to Bespoke Investment Group. 

At its low point Monday the Dow was down 659.61 points, at 24,861.38, or 6.6% off its Jan. 26 record high. The broader S&P 500 also is now down more than 5% for the first time since Brexit. 

The long period of time since the last scary market event makes the current drop, which market pros had been warning about, seem worse than it is.

“No matter how well telegraphed or forecasted a pullback may be, it’s still never fun,” Chris Verrone, a stock strategist at New York-based Strategas Research Partners, told clients in a report. 

Despite the huge declines, the selling is not being described as a panic, but rather a price correction in response to the Dow’s ebullient 1,900 point rise in the first 18 days of the year and the nearly 8,300 point jump since President Trump was elected.

“This is not a panic,” says Gary Kaltbaum, president of Kaltbaum Capital Management. 

Still, the fact that the Dow has now dipped more than 5%, coupled with its inability so far today to mount a sustainable rebound, boosts the chances of further drops.

“A 10% drop is definitely getting more likely if we continue to get days like today,” Kaltbaum said. 

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Wall Street pros, citing still strong business conditions in the U.S., continued to try to put the recent market downturn in perspective, reminding investors that the broad Standard & Poor’s 500 stock index had rallied nearly 44% following its last 5% downturn 20 months ago. Heading into the new week of trading, the large-company stock index was down 3.9% from its Jan. 26 peak.

Analysts also point to the fact that corporate earnings for S&P 500 companies remain strong and are seen rising by 18.4% in 2018, up from 12.4% last year, according to data from earnings-tracker Thomson Reuters.

And the combination of stronger earnings and sliding stock prices has also made the market less expensive that it was prior to the recent downturn, adds Keith Lerner, chief market strategist at SunTrust Private Wealth. The market P-E has dropped from 18.5 to 17.5 in the past week.

The fear is that the Federal Reserve, which has signaled that it will raise interest rates three times this year, or a total of three-quarters of a percentage point, could be forced to hike rates four times, or 1% total, in an effort to slow the economy down. Higher borrowing costs slow economic growth, while higher interest rates make bonds a more attractive investment alternative to stocks.

Wall Street sought to spin the interest rate hike as less spooky as the initial market reaction.

They stress that a rise in rates due to a stronger economy is a positive for stocks.

Despite concerns that higher interest rates will make it hard for stocks to keep climbing, Wall Street pros rolled out a few data points to counter that fear. For example, in the 21 episodes since 1945 when the yield on the 30-year U.S. government bond saw a  “significant” rise, the stock market rose 18 times, according to data from investment firm TrendMacro. 

And despite three quarter-point interest rate increases from the Fed last year, its key short-term rate, which is now pegged at a range of 1.25% to 1.5%, is still “lower” than it was in October 2018 on the day Wall Street titan Lehman Brothers filed for bankruptcy, data from Bespoke Investment Group show.

Last week, selling in the bond market caused the yield on the 10-year Treasury — which moves in the opposite direction — above 2.85% for the first time in four years. In early trading Monday, the yield ticked up as high as 2.88%, before retreating to 2.86%.

While some Wall Street pros worry that stocks could be hurt more if the 10-year hits 3%, an analysis done by Credit Suisse equity strategist Jonathan Golub found that “rising rates are a positive for stocks until the 10-year hits 3.5%.”

Despite that upbeat data point, it has been the abruptness of the higher move in borrowing costs that has “spooked investors,” Golub explained.

 

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