Blue-chip index declines 330 points, its fifth straight down day, as volatility continues to rattle stocks
U.S. stocks extended their decline Monday and the Dow Jones Industrial Average slid into a bear market, reflecting investor concern about the pace of global growth and the price of central-bank efforts to slow inflation.
The Dow’s decline of 329.60 points, or 1.1%, to 29260.81, marked its fifth down trading day in a row. The move put the Dow into its first bear market—defined in Wall Street parlance as a drop of 20% or more from a recent high—since the early days of the pandemic.
Investors and analysts said sentiment continued to be negative as traders worry about the outlook for interest rates and the possibility that stress from the second extended period of declines this year will spill over into unexpected areas.
The S&P 500 fell 38.19 points, or 1%, to 3655.04, hitting a new 2022 low. The Nasdaq Composite, which flitted between gains and losses, slipped 65.00 points, or 0.6%, to 10802.92.
Of the 11 S&P sectors, only consumer staples ticked higher, up less than 0.1%. The declines were driven by energy, real estate and utilities.
The turmoil started early in the day. U.K. assets whipsawed after Chancellor of the Exchequer Kwasi Kwarteng said in weekend interviews that the new government would continue a tax-cutting agenda that had already spooked markets when he unveiled it Friday. On Monday, Susan Collins, the new president of the Federal Reserve Bank of Boston, said she is committed to bringing down inflation even if it means slowing the economy.
Turbocharged volatility has rattled everything from stocks to currencies to commodities in recent weeks. Central banks around the world, including in the U.S., are trying to play catch up with inflation by tightening monetary policy. That has forced investors to reckon with the end of a decadeslong era of low interest rates.
Monday was the S&P 500’s 48th decline of 1% or more this year, according to Dow Jones Market Data.
The stock market’s swoon is a contrast from its short-lived summer rally, when investors were hoping that the Federal Reserve would start cutting interest rates next year and that stocks were nearing a bottom. However, Fed Chairman Jerome Powell poured water on those bets during his August speech in Jackson Hole, Wyo., where he reiterated the central bank’s plan to keep raising rates to fight inflation.
“My worry is there is a sense that the Fed’s going to raise rates until it breaks the economy, or something breaks,” said Paul Donovan, chief economist at UBS Global Wealth Management.
Last week, the Fed offered up another supersize rate increase and signaled that additional large increases are likely even at the risk of a recession. That sparked fresh concerns among already-nervous investors.
“We are worried the Fed’s current trajectory is more aggressive than necessary,” said Jeremy Schwartz, global chief investment officer at WisdomTree Asset Management.
The Fed’s higher rates are rippling to all corners of the economy. Mortgage rates are twice as high as they were a year ago, and while inflation overall remains stubbornly high, the rising rates have indeed cooled the housing market. Home prices continue to notch year-over-year gains, but they are falling month to month. Mr. Schwartz said that is a sign that inflation could be slowing.
U.S. government-bond prices fell, pushing yields higher yet again. The yield on 10-year Treasurys rose to 3.878%, its highest level since 2010.
“The market is finally coming back to reconciling the steps that the Fed is indeed going to take,” said Brando Reyna, portfolio manager for Novare Capital, a Charlotte-based investment adviser managing $1.3 billion in assets. “They [Fed] said, ‘Our biggest concern is inflation,’ and I agree with them 100%.”
‘We are worried the Fed’s current trajectory is more aggressive than necessary.’
— Jeremy Schwartz, global chief investment officer at WisdomTree Asset Management.
Goldman Sachs, a Dow component, slipped $7.35, or 2.4%, to $294.62. Boeing, also part of the Dow, fell $3.92, or 3%, to $127.34.
The U.S. dollar strengthened further. Higher interest rates have supercharged a dollar rally that has ricocheted through financial markets this year, exacerbating a slowdown in growth and worsening inflation headaches for central banks outside the U.S.
Investors initially sold the pound, at one point sending sterling to $1.0349, its lowest level on record. The currency rebounded some in later trading hours.
Traders dumped U.K. government bonds on expectations that higher government borrowing will fuel inflation and prompt the Bank of England to raise interest rates more aggressively. That sent borrowing costs soaring. Two-year gilt yields rose to 4.481%, up from 3.971% Friday and 3.519% Thursday—a massive move in bond-market terms.
Yields on 10-year U.K. government bonds rose to 4.235% from 3.813% Friday and less than 3% at the start of the month. Analysts said the combination of a falling currency and higher bond yields is more often seen in emerging markets than a major economy, pointing to a loss of confidence in U.K. economic policy among international investors.
The U.K. relies on investment flows from abroad to finance its trade deficit, which is likely to widen this winter due to the cost of importing natural gas. But the government has “just been doubling down and saying the market’s wrong,” said Jonas Goltermann, senior markets economist at Capital Economics, a consulting firm. “And we all know how that ends.”
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Rocketing energy prices in Europe have introduced yet more uncertainty for investors, hurting the region’s economy and spurring governments, including the U.K.’s, to spend tens of billions of dollars to protect households and businesses. Stop-start Covid-19 lockdowns in China, meanwhile, have snagged international supply chains and slowed the world’s second-biggest economy.
Investors in the U.S. are also watching the next leg of earnings to figure out the trajectory of markets.
“Earnings estimates have not come down yet very much, and if there is a hard landing and a recession next year, then the next shoe to drop would be corporate earnings,” said Jon Snare, managing partner at Bordeaux Wealth Advisors in Seattle.
Stock markets outside the U.S. broadly retreated. The Stoxx Europe 600 fell 0.4%, pulled down by utility companies and U.K. home builders.
One outlier was Italy’s FTSE MIB, which rose after a right-wing coalition won an election. Investors so far are judging that the group won’t pursue economic policies that put it at odds with the European Union. Yields on Italian bonds, a gauge of investor angst regarding the country’s debt burden, inched up.
Asian markets fell, tracking the drop in U.S. markets on Friday. The Shanghai Composite Index lost 1.2% and Japan’s Nikkei 225 fell 2.7%.
Oil prices, which can reflect investors’ expectations for economic growth, extended recent declines. Brent-crude futures fell $2.09 per barrel, or 2.4%, to $84.06. They have dropped about 13% in September, with traders predicting that slowing economic growth will lead to weaker fuel demand.