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S.&P. and Dow Plunge, Extending Stock Sell-Off Stock Markets Tank, Deepening Losses
(35 minutes later)
Markets tanked on Monday as investors assessed whether the global economy was moving away from the slow growth, low inflation, and low interest rates that prevailed over the last decade. Since the global financial crisis a decade ago, a few simple guidelines have helped investors make sense of the markets.
The Standard & Poor’s 500-stock index was off by nearly 4 percent on Monday. The weakness built off the previous week, when stocks had their worst performance in two years. Global growth and inflation will be perpetually low. Central banks will help by keeping interest rates low. And stocks will almost invariably rise.
If the momentary market sputter turns into something worse, it could become awkward for President Trump. He has repeatedly claimed credit for the surging stock market, and gave the markets a high-profile mention at his State of the Union address last week. At its recent peak, the S. & P. 500 was up 27 percent since Mr. Trump took office. But that number has slipped with the recent sell-off to roughly 20 percent. The rulebook is now changing, a shift that is sending tremors through the financial markets. The Standard & Poor’s 500-stock index fell by more than 4 percent on Monday, deepening its losses from the previous week. Bond yields, the basis for key borrowing costs such as mortgage rates, have risen fast in recent weeks.
Mr. Trump’s habit of regularly boasting about stock market increases is a practice other presidents avoided because they knew that what goes up may go down again and they did not want to take the blame for market forces beyond their control. Investors are digesting the growth prospects for the world — and rebalancing their views on the risks and rewards of investing in risky assets like stocks compared to safer spots such as government bonds.
The world’s largest economies are all expanding, as the most important central bank, the United States Federal Reserve, is actively draining billions of dollars from the financial system and raising interest rates. And investors are concerned that tenuous signs of inflation could mean central banks will start to remove their support even faster.
A rocky patch for the markets could become awkward for President Trump. He has repeatedly claimed credit for surging stocks, while business optimism over his push to cut taxes and lessen regulation has helped fuel the “Trump Bump.”
Mr. Trump’s habit of regularly boasting about stock market surges is a practice other presidents avoided. They knew that what goes up may go down again, and they did not want to take the blame for market forces beyond their control.
The economy is in tricky territory from a markets perspective. While investors have been excited about the prospects of the tax cuts, they are also fretting that the government may be spending too much to pay for them.
Economists often advise governments to run large deficits during recessions to stimulate growth. But the United States economy is already strong.
It grew at an annual pace of 2.6 percent last quarter. Unemployment was 4.1 percent January.
In essence, the $1.5 trillion tax cut is stimulus that the economy doesn’t need. The extra money raises the prospect that the economy could overheat, stoking inflation.
“We’re pouring a tremendous amount of fuel on the fire,” said Rick Rieder, who oversees roughly $1.7 trillion in assets as global chief investment officer for fixed income at asset manager BlackRock.
The weakness on display in the United States markets last week set a tone for the open of trading in foreign markets. Japan’s Nikkei 225 dropped by 2.6 percent on Monday. Benchmark equity indexes in France, Italy and Spain all fell by more than 1 percent.The weakness on display in the United States markets last week set a tone for the open of trading in foreign markets. Japan’s Nikkei 225 dropped by 2.6 percent on Monday. Benchmark equity indexes in France, Italy and Spain all fell by more than 1 percent.
Bond markets, too, were soft. The yield on the 10-year U.S. Treasury — a cornerstone of the interest rates that matter to consumers, like those for mortgages — remained above 2.8 percent on Monday.Bond markets, too, were soft. The yield on the 10-year U.S. Treasury — a cornerstone of the interest rates that matter to consumers, like those for mortgages — remained above 2.8 percent on Monday.
Treasury yields have moved sharply higher in recent weeks, as a broad global economic expansion and incipient signs of upward pressure on wages in the United States. Investors appear concerned that inflationary pressure could push central banks to move quickly to remove support for their economies.
That support, which has included keeping short-term interest rates low and taking extraordinary measures to push longer-term interest rates lower, has been seen as the fuel behind the long bull market for stocks.
“We think there is growing concern about the inexorable rise getting out of hand,” Morgan Stanley stock market analysts wrote in a note on Monday.
A sharp rise in bond yields could be a cause for concern about the economy. Yields on government bonds like United States Treasury bonds are effectively the price that governments pay to borrow from global investors. The yields provide a baseline for determining the costs of borrowing for entities ranging from large corporations to first-time home buyers.
On the other hand, there are good reasons for yields to be climbing. Bond yields typically move higher during times of robust economic growth, and the world’s large economies are now growing the first time since the financial crisis hit nearly a decade ago.
On Monday, an index of eurozone purchasing manager activity, considered a good gauge of economic growth, hit a 12-year high, suggesting that the surprisingly strong European economy has further room to expand. Last year, the monetary bloc grew at its fastest annual pace in a decade.
Economists at the French bank BNP Paribas recently upgraded their forecast for economic growth in the eurozone from 2.8 percent from 2.4 percent.
“The economic upswing underway in the eurozone is proving stronger than many had initially assumed,” they wrote in a note to clients last week.