Pullbacks of such magnitude are relatively common and usually occur over a two- to three-month period. But the jarring plunges over the past two weeks — on Thursday the Dow tumbled nearly 500 points in a mere 30 minutes before the closing bell — are beginning to reshape sentiment on Wall Street. Some analysts are predicting darker, more volatile times ahead.
The declines, if they persist, and the fear they would generate could have ripple effects on the economy, which is performing solidly in the United States and abroad. When people see massive losses in their brokerage accounts or 401(k) retirement plans, they tend to lose confidence and spend less.
Investors also are growing concerned that inflation is rising, which is compelling central banks to raise interest rates. That makes it more expensive for companies and consumers to borrow, hampering actual economic activity.
“Ten percent is no small potatoes,” said Chris Rupkey, an economist with MUFG Union Bank. “It’s a big number. That loss of wealth is going to take a toll on overall spending in the economy both for businesses and individuals.”
Regardless of whether the market continues on its downward trajectory — a much more menacing “bear market” looms if stocks fall 20 percent — many analysts said the past two weeks of dramatic drops, rapid rises and followed by more heart-pounding dives have already made a distant memory of the blissful and steady multiyear rise in stocks.
One factor that may have contributed to Thursday’s sell-off were remarks by the Bank of England, which said it might have to raise interest rates “earlier” and by a “somewhat greater extent” than it had thought.
That reinforced to markets that the easy-money policies put in place by central banks during the global recession a decade ago are coming to an end. Instead, policymakers will be raising interest rates to keep inflation in check.
Thursday’s losses wiped out all of the gains for the year for the Dow and the S&P 500. The Dow dropped 1,032 points to close at 23,860.46 — the second time it has lost more than 1,000 points over the past week. The Dow is 10.4 percent below its all-time high on Jan. 26.
The technology-laden Nasdaq and S&P also tumbled Thursday, with each declining nearly 4 percent. Trading volumes were far above normal.
The slide continued early Friday in Asia, where the markets in China fell more than 5 percent, and in Hong Kong and Japan more than 3 percent.
Alexandra Coupe, associate director at PAAMCO, said rising inflation makes stocks less attractive as a place to invest.
“If I have to choose bonds or equities, with interest rates going up, bonds just got more attractive,” she said.
Coupe said the volatility is rising because investors are undecided whether stocks or bonds are the better bet at the moment. Bonds are safer but often return less money than stocks.
“You don’t want to move too much too soon” into bonds, Coupe said. “You don’t want to be caught in fixed income as rates are moving up. That’s why everybody is going back and forth. We haven’t had inflation, and now we have it and everyone freaks out. Be careful what you wish for.”
On Thursday, the yield on the benchmark U.S. 10-year Treasury bond touched a four-year high before falling back to 2.83 percent. A 3 percent yield is looked upon by investors as a sign that investors are fleeing the risk of stocks for the relative safety of bonds.
“There is a lot of concern in the rising yield in the 10-year Treasury note,” said David Kass, professor of finance at the University of Maryland. “As it approaches 3 percent, concerns about inflation and competition for stocks by fixed-income securities are increasing.”
Some believe the 3 percent yield is inevitable. Bond yields are rising as the Federal Reserve trims its U.S. bond holdings and pulls back on its easy-money policies. The Treasury is also having to borrow more money, partly because of recently enacted tax cuts.
Some analysts stressed that the economy remains strong, noting that the markets are fickle and have long been vulnerable to fears of what is to come.
Indeed, several companies reported strong earnings Thursday, a pattern that is expected to continue throughout the year.
Social-media company Twitter posted its first profit, and Yum Brands, Cardinal Health and Tyson Foods also exceeded earnings expectations. Nearly 80 percent of companies that have reported so far in this earnings season have surprised analysts to the upside.
“When the market declines sharply, everyone naturally wonders ‘What’s wrong?’ ” said Greg McBride, chief financial analyst at Bankrate.com. “Nothing is wrong economically. The economy is doing better now than it has any time in the past decade. This is just some healthy, and overdue, volatility to wring out any excess.”
LPL Research released a report titled “Volatility is Back,” which pointed to fear of rising interest rates as the source of the recent swings, but cautioned that the economy is fundamentally strong.
“The primary culprit was higher-than-expected wage growth in the January jobs report, which may have increased fears that the Federal Reserve would be more aggressive with interest rate hikes in 2018,” according to LPL. “However, the selling pressure unmasked a variety of issues, including investor complacency and the difficulty of unwinding crowded and complex trades involving leverage, or borrowed money.”
“Though never any fun to endure,” it said, “pullbacks are a normal course for long-term investing.”