“Volatility is back,” said Jamie Cox of Harris Financial Group. “It’s not back in a big way, but it’s not going to be dormant like it was in 2017. That’s the real story.”
While navigating volatile trading, money managers urged investors to keep calm, noting that the U.S. and global economies remain strong. On Tuesday, major companies reported another round of strong profits, with General Motors, BP, Allergan, health-care companies and others beating analysts’ expectations.
Veteran traders and stock strategists say the slide in stock prices over the past week is a natural dip. In their view, the market had run up too high too fast and needed to let off some steam.
Federal Reserve Bank of St. Louis President James Bullard told reporters after a speech in Lexington, Ky., that “this is the most predicted sell-off of all time because the markets have been up so much and they have had so many days in a row without meaningful down days,’’ Bloomberg News reported.
Bullard played down the risk of inflation, saying that data Friday showing a jump in average hourly earnings did not mean the economy was on the verge of a resurgence of inflation. He said that other measures of wages were more restrained, Bloomberg News reported.
Yet the markets remained nervous as exchanges in Asia and Europe plunged after Monday’s record single-day 1,175-point drop in the Dow, renewing questions about whether the long-running stock rally is heading for a rout that might undercut President Trump’s frequent boasts claiming credit for the markets’ rise.
“I think you’ve seen a normal market correction, although large,” Treasury Secretary Steven Mnuchin said Tuesday at a House Financial Services Committee hearing. He said computer trading algorithms “definitely had an impact on market moves.”
Asked whether the administration would take responsibility for downturns as well as increases in the stock market, Mnuchin said, “We’ll still claim credit that it’s up over 30 percent since the election.”
All U.S. stock market indexes finished on an upswing Tuesday. The broader Standard & Poor’s 500-stock index ended up 1.7 percent, while the tech-heavy Nasdaq was up 2.1 percent. Materials, technology and consumer discretionary were leaders, while rate-sensitive utilities and real estate declined. The yields on 10-year Treasury bills stood at 2.8 percent, below recent highs, and corporate bond rates held steady Monday, suggesting that a stampede out of stocks is not imminent.
Blue-chip winners included Dow DuPont (up 6 percent), Home Depot (4.3 percent) and Apple (4.2 percent). Among the losers: Exxon Mobil (down 1.7 percent), Merck (1.7 percent) and Coca-Cola (0.5 percent).
The Dow briefly crossed into correction territory earlier in the day’s trading, down more than 10 percent since its Jan. 26 high. The S&P 500 came close to the 10 percent correction threshold but did not cross it.
Amid the selling frenzy, traders were left trying to assess whether this was just a roller-coaster moment in an overall climbing market or a pivot point that could end a historic upward run by markets that created billions of dollars in paper wealth.
Investment adviser Edward Yardeni, author of the forthcoming book “Predicting the Markets,” said there have been 60 panics in the bull market that date to March 9, 2009. Four of the panics knocked 10 to 20 percent off stock prices before the market recovered, Yardeni said.
The latest sell-off is “Panic Attack No. 60 rather than the beginning of a bear market,” he said. “We can’t rule out a 1987-like event, which amounted to a one-day bear market.”
He added that “this time around, we have Blue Friday followed by Black Monday. While investors have suffered a black-and-blue bruising, we believe that the underlying strength in the global economy combined with the Trump tax cuts will boost earnings significantly this year.”
Analysts said that the pace of the inevitable rise in interest rates remained a concern but that Monday’s afternoon plunge appeared to be linked to computer trading rather than fundamental economic problems. Others said that a correction in stock prices was overdue.
Pavel Molchanov, equity analyst at the firm Raymond James, said the sell-off resembled the computer-driven “flash crash’’ of 2010 or the sell-off after the Brexit referendum rather than a rerun of the financial crisis a decade ago.
“To state the obvious, on a percentage basis, yesterday’s drop doesn’t even enter the top 250,” Molchanov said. “Also, the past week provides a reminder — painful but timely — that volatility has not been repealed. Nothing goes up in a straight line.”
Trump had often boasted about the 42 percent stock climb since Election Day 2016, but he has grown silent since the markets began their fall.
Vice President Pence shrugged off the downturn as “simply the ebb and flow” of financial markets.
Although a dip had been expected for a while, U.S. losses seemed to spook global markets. “There’s genuine carnage out there,” said Chris Weston, chief market strategist at IG in Melbourne, Australia. “Everyone is just running for the hills because nobody actually knows what’s causing this move.”
The fear was amplified by the fact that markets have been so stable for so long, he said: “We have become so accustomed to subdued volatility, so these moves feel even bigger than they are.”
Wall Street has had a great run: The Dow was up over 26 percent from January 2017 to January 2018. As Trump keeps saying on Twitter, the U.S. economy also looks solid, with unemployment at a 17-year low.
The sell-off started Friday when generally positive U.S. jobs figures showed strong wage growth, deepening concerns about inflation and possible rate hikes by the Federal Reserve — a “good news is bad news” scenario.
Still, the Dow’s precipitous drop created a climate of uncertainty in global markets.
“The sell-off is just a natural response to the moves in the U.S.,” said Richard Jerram, chief economist at the Bank of Singapore. “It is hard to find an Asia-centric explanation of the moves.”
And how long with the sell-off last? “Until the U.S. stabilizes,” he said.
Rauhala reported from Beijing. Shirley Feng, Yang Liu and Amber Wang in Beijing, William Booth in London, and Brian Murphy in Washington contributed to this report.