The Dow Jones industrial average plunged 2.5 percent Friday — closing down 666 points — and suffered its worst week in two years as concerns over rising interest rates and inflation from an overheated economy triggered a long-feared sell-off.
The U.S. and world economies are so strong that people think the situation cannot last. Concerns were fueled by a Labor Department report that wages in January were 2.9 percent higher than a year ago and unemployment held at 4.1 percent. A tightening labor market sparked fears that interest rates will rise.
The point swing was eye-popping, but in terms of the percent of the loss, the decline did not appear to alarm investors. The Dow and the Standard & Poor's 500-stock index are off 4 percent from their all-time highs.
"A Dow point today isn't what it used to be," said Jeffrey DeMaso, director of research at Adviser Investments. "On October 19, 1987, the Dow fell 508 points, or 22.6 percent. Today's decline of 666 points was just 2.5 percent."
None of the indexes was close to dropping 5 percent Friday, which is considered by some to signal a coming correction. But all three major indexes went negative, with the tech-heavy Nasdaq falling 2 percent. The S&P 500 finished down 2.1 percent.
The yield on the key 10-year Treasury spooked markets by hitting 2.84 percent Friday, the highest level in four years. The 3 percent yield is considered a key threshold that can drive investors out of equities and into bonds.
"The pullback has everything to do with the 10-year Treasury moving higher, breaching that 2.8 percent level," said Wayne Wicker, chief investment officer at ICMA Retirement Corp. "Investors are concerned that it moves the trajectory of Fed rate hikes maybe to four rather than three this year."
Wall Street watchers are worried that the Federal Reserve under new chair Jay Powell may overreact and boost rates, bringing the market run to a hard halt and slowing the U.S. economy. The U.S. Treasury is also having to borrow more money, partly because of the tax cuts, and issuing more debt tends to raise yields.
"Rates are rising today specifically on the very good jobs numbers for January and, more importantly, you have seen wage growth pop up to 2.9 percent year over year, which is a notable acceleration," said Jeffrey Schulze, an investment strategist at ClearBridge Investments. "It means you are going to see an inflation picture continuing to firm and strengthen over the course of 2018, which will drive 10-year Treasury yields higher and cause the Fed to reconsider its gradual pace of tightening."
Friday's retreat came two days after the market finished a powerhouse January, closing its best month in almost two years. The Dow finished up 5.8 percent to start the year.
Markets have turned more volatile after a relatively quiet 2017. Friday's drop follows a big pullback earlier in the week, led downward by health-care stocks. Wall Street observers see a number of culprits conspiring against the bull market, including investors taking some chips off the table.
"If you think about the market rallies since mid-December, it's been the market pricing in the realities of tax reform," Schulze said. "Now that this is priced into the market, investors are looking to take some profits off the table."
The airwaves and online chatter have been flooded in recent weeks with speculation of a market pullback like the one that thundered in on Friday.
"It looks like the beginning of a market correction," said Luke Tilley, chief economist at Wilmington Trust, the wealth and investment advisory arm of M&T Bank. "It's not something that is very surprising, given the low volatility that we saw in 2017."
Market declines of 10 percent are considered a correction.
"We expected this volatility to be higher and that there would be a correction sometime this winter or spring," Tilley said. "We don't expect a bear market unless there is a turn in the economy, which we are not seeing right now."
On Friday, Chevron and Visa were a drag on the market, with the oil giant dropping 5.57 percent and the credit card company down 3.83 percent. ExxonMobil was down 5.1 percent on disappointing earnings. Apple was down 4.34 percent and Goldman Sachs was down 4.48 percent.
Amazon.com (founded by Washington Post owner Jeffrey P. Bezos) was a bright spot among major companies in the technology sector with a 2.87 percent gain.
Some were ascribing the market turbulence to political concerns in Washington over the special-counsel investigation into Russian meddling in the 2016 election and reports about a sensitive memo.
Wicker said that even with a strong economy, a correction in the S&P 500 is long overdue.
"We haven't had a correction of 5 percent for over 400 days," he said. "That's a long streak. You usually have a correction of that magnitude every 90 to 120 days."
Historically, he said, a strong January stock market tends to foreshadow a healthy year-long return. He expects a good 2018.
Friday's decline "is nothing out of the ordinary," he said. There will be more market swings this year, and Wicker said he advocates riding it out. "Don't try to time the market," he said.