Stock markets Dow Jones suffers worst day in over six years as global stock markets plunge The Dow Jones industrial average dropped 4.6% as investors fled amid fears of rising interest rates: ‘This was volatility unleashed’ Stock market sell-off: live updates
Traders on the floor of the New York stock exchange on Monday, when the Dow Jones plunged. Photograph: Richard Drew/AP
US stocks took a further steep plunge on Monday, with the Dow Jones industrial average dropping 1,175 points, the largest one-day points fall on record and erasing all the gains made so far this year.
Why are global stock markets falling? Read more
The drop came after another bad day on global markets as investors reacted to global equity losses overnight and concern that central banks will increase interest rates in response to inflationary pressures from surging global economies.
The Dow dropped 1,600 points in one instance before bouncing back. The index is now off more than 1,800 points over two days of trading. Global stock markets have shown little volatility over the last few years amid a period of unprecedented low interest rates that followed in the wake of the great recession.
But on the day that new Federal Reserve chair, Jerome Powell, took office, replacing Janet Yellen, that quiet period seemed to be over.
“This was volatility unleashed,” said Jack Ablin, chief investment officer at at Cresset Wealth. “It’s partially fear of interest rates, partially this new Fed chairman Jerome Powell, partially the market is overvalued relative to fundamentals.”
While market fear may not be based in any change in economic fundamentals, in its last meeting under chair Yellen, the Federal Reserve indicated it expects inflation pressures to increase through the year.
According to projections released in December, officials expect three rate hikes in 2018 – so long as market conditions remain broadly as they are – but some economists believe the central bank could add another increase at its final meeting of the year.
If the market falls continue they could prove problematic for Donald Trump who has consistently touted record high stock markets as proof that his presidency is boosting the economy.
US stocks have now lost $1tn in value in the first five days of February. However, the White House, responding to the market drop insisted on Monday night that long-term economic fundamentals “remain exceptionally strong”.
Donald J. Trump (@realDonaldTrump) Dow, S&P 500 and Nasdaq all finished the day at new RECORD HIGHS! pic.twitter.com/wJyB9d00hh
The plunge, initially triggered by fears that strong US employment numbers would lead to wage demands and rising inflation, represents the first two-day drop of 1,000 points or greater for the Dow since August 2015.
The sell-off was reflected on other US indexes, with the S&P 500 also recording its steepest drop since 2015 and erasing its gains for the year. The sell-off represents a stark turnaround in market sentiments, said Ablin.
“In the middle of last month, optimism, bullishness and complacency was at an all-time high. It’s certainly fearful now,” said Ablin.
In London, shares in Britain’s top 100 publicly listed companies on Monday suffered their worst single-day slump since Theresa May called the snap election last April.
The index of Britain’s top 100 companies stretched its longest losing streak since last November into a fifth day, following a 1.3% fall. The FTSE 100 index tumbled to 7,345, having peaked at almost 7,800 last month.
Why are global stock markets falling? Read more
Hussein Sayed, the chief market strategist at currency dealer FXTM, said investors were nervous about the prospect of higher interest rates. “The era of cheap money is ending, and for markets who got addicted to it, it’s undoubtedly bad news,” he said.
The Fed is expected to react to survey data published last week showing that average US wage growth hit 2.9% in January and could go above 3% in the next few months. Wage increases are one of the main components pushing up prices in US shops.
Stock markets remain high globally and the economies of most of the world’s biggest countries are robust. But fears about the pace of rate increases and the size of the US’s ballooning deficit have worried some investors.
Last week, a member of the Fed’s main interest-rate setting committee, Robert Kaplan, suggested that rates could increase by more than 0.75 percentage points this year if the economy maintains its fast rate of growth and wages continue to rise strongly. He said: “You will see some inflation pressure this year. I believe that the Fed should be removing accommodation gradually but deliberately.”
Mark Haefele, the global chief investment officer of wealth management at UBS, said the bond market, which trades in government and corporate debt, remained steady despite recent declines in values that increased the likelihood of defaults. He said stock market investors should sit tight while bond yields, which measure the risk attached to each bond, remained modest. “We don’t believe that now is a time to reduce exposure to stocks.”
Greg McBride, chief financial analyst at Bankrate, said: “Markets have been addicted to low interest rates and global central banks pumping money into the financial system. As economies around the world are improving, this means higher interest rates and less stimulus from central banks. That’s why investors are throwing a hissy-fit. Not because anything is wrong.”
Far eastern markets fell overnight by the most in over a year, with the Nikkei among the worst affected following a 2.5% drop to 22,682. The price of a barrel of Brent crude oil slid to $67.30 from above $70 in the middle of last month. The FTSE’s fall was limited by worse than expected economic data that sent the pound down to $1.40 from $1.42 overnight.
Car registrations in the UK slumped by 6% in January and the Markit/CIPS survey of the services sector recorded its worst level of growth for 16 months.
Many of the UK’s biggest businesses earn the majority of their income in dollars and any increase in the dollar’s value versus the pound increases their profits. Last month, Trump boasted that the stock market was a measure of his successful first year in office.
When the market reached 25,075 on 5 January, an increase of more than 1,000 points in little over a month, He said: “Record fastest 1000 point move in history. This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs. Six trillion dollars in value created!”
Image copyright Getty Images
The White House moved to reassure markets on Monday after the Dow Jones Industrial Average index dropped by 1,175 points.
The leading US stock market index closed down 4.6% at 24,345.75, one of the largest falls in recent years.
The White House said it was focused on "long-term economic fundamentals, which remain exceptionally strong".
The fall surpasses a previous record 777.68 points drop on the Dow Jones during the financial crisis in 2008.
That came after Congress rebuffed a $700bn bank bailout plan following the collapse of investment bank Lehman Brothers.
Monday's decline is also the largest fall in percentage terms for the Dow since August 2011, when markets dropped in the aftermath of "Black Monday" when Standard & Poor's downgraded its credit rating of the US.
What has the reaction been?
The decline in the Dow was closely followed by the wider S&P 500 stock index, down 4.1% and the technology-heavy Nasdaq, down 3.7%.
In London, the FTSE 100 index of leading companies also fell to close down 1.46% or 108 points lower.
In Tuesday's early Asian trade, stocks were following Wall Street's trend. Japan's benchmark Nikkei 225 was down 4.8% but then recovered slightly and Australia's benchmark S&P/ASX 200 was down 2.7%. In South Korea, the Kospi was down 2.3%.
Why is this happening?
Investors are reacting to changes in the outlook for the American and global economy, and what that might mean for the cost of borrowing.
The stock market sell-off accelerated on Friday when the US Labour Department released employment numbers which showed stronger growth in wages than was anticipated.
If salaries rise, the expectation is that people will spend more and push inflation higher.
To keep that under control, America's central bank will need to raise interest rates, which has spooked investors who were expecting the US Federal Reserve to increase rates only two or three times this year. They now predict more rate rises.
Monday's sell-off was driven by firms moving to sell stocks to put more money into assets such as bonds which benefit from higher rates, says Erin Gibbs, portfolio manager for S&P Global Market Intelligence.
"This isn't a collapse of the economy. This isn't a concern that markets aren't going to do well," she said.
"This is concern that the economy is actually doing much better than expected and so we need to re-evaluate."
What has driven the Dow's surge?
Stronger global growth has prompted central banks in Europe, Canada and elsewhere to ease away from policies put in place to stimulate the economy after the financial crisis.
What impact will this have?
Analysts say investors should be prepared for choppier stock markets in the months ahead.
Ever since he was elected in November 2016 President Donald Trump has tweeted a number of times about the increase in US stock markets, using the gains since he took office to illustrate market improvement.
On 7 January, he wrote: "The Stock Market has been creating tremendous benefits for our country in the form of not only Record Setting Stock Prices, but present and future Jobs, Jobs, Jobs. Seven TRILLION dollars of value created since our big election win!"
But the Dow closed Monday having shed about a third of its gains since Mr Trump took office in January 2017.
It marks a dramatic turnaround from January, when it raced past the 25,000 and 26,000 point milestones in less than a month.
Joel Prakken, chief US economist for IHS Markit, predicts share price gains will be limited over the next two years.
But he added that markets would need to deteriorate more significantly for him to start to worry about the broader economy.
"The difference between this year and last year is we're going to see more periods of volatility like this as the market reacts to higher inflation," he said.
"We're just not used to it because it's been so long since we've had a significant correction."
What does it mean for investors?
Investors have been bracing for a downturn after months of seemingly unstoppable gains.
Amid the market plunge on Monday, websites for several large money management companies suffered slowdowns or crashes.
Wall Street firms also said they have been fielding calls from people worried about their investments.
Analysis: By Anthony Zurcher, BBC North America reporter
Image copyright Getty Images Image caption Jerome Powell was sworn in as the new chairman of the US Federal Reserve on Monday
Boasting about stock market gains is a dangerous game that most presidents avoid playing. Barack Obama did it occasionally, but only after the US economy had climbed significantly from the wreckage of the 2008 collapse.
After warning of a market bubble during the campaign, however, Donald Trump became the Dow Jones's biggest cheerleader- in tweets, at rallies and even during last week's State of the Union address. That set up the jarring visual of the president boasting about the benefits of his tax cuts in a speech as the markets headed south.
US cable news channels, which had been airing the president live, cut into their coverage to report on the record-setting day. It was a highly visible hiccup in the recent US economic success story that will be hard for most Americans to miss.
The president will make the case that the fundamentals in the economy are still strong. Wages are up and unemployment is down - possibly contributing to stock drop. If growth continues, this could be chalked up as yet another rhetorical mis-step by a non-politician.
If it's the beginning of a larger correction in an election year, however, the president's words could come back to haunt him.
It was the scariest day on Wall Street in years.
Stocks went into free fall on Monday, and the Dow plunged almost 1,600 points -- easily the biggest point decline in history during a trading day.
Buyers charged back in and limited the damage, but at the closing bell the Dow was still down 1,175 points, by far its worst closing point decline on record.
The drop amounted to 4.6% -- the biggest decline since August 2011, during the European debt crisis. But it was nowhere close to the destruction on Black Monday in 1987 or the financial crisis of 2008. Still, for investors lulled to sleep by the steady upward climb since Election Day, it was alarming.
And the rout in U.S. markets continued to ripple around the globe. Japan's Nikkei index plunged 4% in Tuesday morning trading while the S&P/ASX 200 in Australia dropped 3%.
The White House said in a statement that President Trump was focused on "our long-term economic fundamentals, which remain exceptionally strong." The statement cited strengthening economic growth, low unemployment and increasing wages for workers.
The trouble in the market began early last week, when investors focused on a number of lingering concerns.
If the economy gets much stronger, it could touch off inflation, which has been mysteriously missing for the nine years of the post-crisis recovery. That could force the Federal Reserve to raise interest rates faster than planned.
"People are dealing with the shock of seeing real inflation for the first time in a while," said Bruce McCain, chief investment strategist at Key Private Bank.
The sell-off wiped out the Dow and S&P 500 gains for the year, and left the Nasdaq barely in positive territory for 2018.
Related: Market mayhem puts Trump in a tough spot
Investors have also been nervously watching the bond market, where yields have been creeping higher. As yields rise, bonds offer better returns, which makes them more attractive to investors compared with risky stocks.
Stocks sank throughout the day, then went off a cliff in the final hour of trading. The Dow was down 800 points at 3 p.m. Within minutes, it was down 900, 1,000 -- and then 1,500 points. At its low, the Dow was down 1,597 points, before buyers rushed in and limited the decline.
The Nasdaq slumped more than 2%, quickly turned positive, then sank again. It finished down almost 4%. The S&P 500, a broader gauge of the market than the Dow, declined more than 4%.
The plunge pushed stocks closer to what's called a correction, or a 10% decline from their most recent high point. The S&P 500 is down almost 8% from its all-time high.
"The stock market is throwing a tantrum," said Andres Garcia-Amaya, CEO of wealth management firm Zoe Financial.
"Take a deep breath," said Garcia-Amaya. "I know it's been a while since we had a day like today, but nothing has really changed from a fundamental standpoint."
The market started 2018 with a bang, but last week was the worst on Wall Street in two years. The selling gathered steam on Friday when the Dow plunged 666 points, or 2.5%, at the time its worst day since the Brexit mayhem of June 2016. Nearly $1 trillion of market value was erased from the S&P 500 last week.
"You had a market that was overbought and ripe for something to undermine its tranquility," said Mark Luschini, chief investment strategist at Janney Capital.
The VIX volatility index, a measure of market turbulence, skyrocketed a record 116% on Monday to the highest level since August 24, 2015, the last time the Dow plunged 1,000 points in a day. The spike signifies how calm Wall Street had been -- and how unprepared the markets were for trouble.
CNNMoney's Fear & Greed Index is flashing "fear," underlining a major shift in market sentiment from a week ago when it was sitting in "extreme greed."
The Russell 2000, an index of smaller stocks that have heavy exposure to the U.S. economy, turned negative for 2018 for the first time.
"Valuations got stretched and that led to a cascading effect today," said Sam Stovall, chief investment strategist at CFRA Research. "The market has to correct itself -- a resetting of the dials -- before this bull market can continue."
Related: Good news for Main Street is freaking out Wall Street
Investors' main concern is the sell-off in the bond market. The 10-year Treasury yield, which moves opposite price, spiked to a four-year high of 2.85% on Friday. It's a dramatic swing from 2.4% at the start of 2018. Higher yields could make normally boring bonds look more attractive when compared with risky stocks.
The U.S. economy is healthy. Friday's jobs report showed that wages grew at the fastest pace since 2009. That's a welcome shift by workers who have been dealing with anemic raises for years.
Has your paycheck gotten bigger thanks to the new tax bill? Will it make a difference? If so, what will you do with the extra money? Tell us about it here.
However, Wall Street is starting to get worried that the "goldilocks" environment of slow growth and mysteriously low inflation may be ending. Besides the fear of faster inflation and interest-rate increases, more robust wage gains could eat into record-high corporate profits.
No matter the cause, the stock market was long overdue to take a breather. Before Friday, the S&P 500 had gone the longest stretch ever without a 3% pullback. Now the S&P 500's record-long period without a 5% retreat is in jeopardy.
Related: This is why the Dow is plunging
While they can be scary, market pullbacks prevent stocks from overheating and give investors who were stuck on the sideline a chance to get in. Janet Yellen, who just stepped down as Fed chief, told PBS on Friday that she still believes "asset valuations generally are elevated."
Despite the recent turmoil, the Dow remains up almost 40% since President Trump's election. The robust performance has been driven by strong corporate profits, healthy economic growth and excitement about the Republican tax cut for businesses.
Analysts at Bespoke Investment Group urged calm.
"Take a deep breath," the firm wrote in a research note on Friday. "For those investors that may have forgotten, this is what a market decline feels like."
The question is whether the market retreat deepens or whether investors buy at the dip, a mentality that has supported stocks for months.
"The fundamentals of the economy remain quite strong," said Janney's Luchini. "It's hard to make the case for why we should be down more than 10% -- unless we encounter negative economic news."
Key Bank's McCain agrees. "We believe this is not the beginning of the end and a tilt towards a bear market. It's premature for that," he said.
Wells Fargo suffered some of the worst of the selling on Monday. The No. 2 U.S. bank plunged 9% after unprecedented sanctions were handed down by the Fed late Friday.
--CNN's Liz Landers contributed to this report.
Stocks surged broadly during the president’s first year in office. By late January the S.&P. 500 was up 27 percent since Mr. Trump’s inauguration. But the last few days of trading cut those gains to just 17 percent.
“When you get this kind of sell-off, it kind of feeds on itself,” said Michael P. Ryan, chief investment officer for the Americas at UBS Wealth Management.
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Although the market opened lower on Monday, it actually had climbed into positive territory in the morning. But the declines snowballed throughout the afternoon. The 4.1 percent drop was the worst for the S.&P. since August 2011.
Back then, the sell-off followed growing concern about a chaotic budgeting process in the United States. A showdown between Congress and the Obama administration over the debt ceiling brought the country to the brink of default. In response, credit rating firm Standard & Poor’s stripped the United States of its triple-A rating, spooking markets.
The economy today is in tricky territory from a markets perspective. Investors have been excited about the prospects of the tax cuts, but they are also fretting that the government may be spending too much to pay for them.
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Economists often advise governments to run large deficits during recessions to stimulate growth. But the United States economy is already solid.
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 may be stimulus that the economy does not need. The extra money raises the prospect that the economy could overheat, stoking inflation.
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“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 the manager BlackRock.
Global investors are also trying to navigate a changing economic backdrop.
After years of sluggish growth, major economies in Europe and Japan appear to have good momentum. On Monday, an index of eurozone purchasing manager activity, considered a good gauge of growth, hit a 12-year high, suggesting that the surprisingly strong European economy has further room to grow.
Against the strength, investors are wondering whether those central banks will tamp down on their efforts to help growth, which could send interest rates higher. Investors are anticipating that the European Central Bank could pull back, depending on the economic conditions.
3-Month Treasury Bills High rate at weekly auction. 1.6 % 1.500% 1.4 1.2 1.0 Oct. Nov. Dec. Jan.
The weakness on display in the United States set the tone for 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.
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In the United States, financial stocks endured some of the steepest drops, led by Wells Fargo. After the close of trading Friday, the large lender was the subject of an extraordinary regulatory action when the Fed barred it from growing until it improved corporate controls.
Industrial stocks tumbled 4.5 percent. The aluminum maker Arconic fell 8.9 percent after its earnings failed to impress investors. The company also said it would bolster capital spending to ramp up production.
Likewise, ExxonMobil fell 5.7 percent Monday. The energy giant disappointed investors with its quarterly earnings report last week. The energy sector was one of the worst-performing parts of the S.&P. 500, falling by 4.4 percent.
The corporate environment reflects further forces, along with the changing course of global central banks, that could add to the choppiness of markets.
For example, oil prices have risen as global growth has picked up steam. That encourages energy companies like ExxonMobil to increase investment, as does provisions in the tax overhaul that make capital spending more advantageous. ExxonMobil has said it plans to spend $50 billion on investments in the United States over the next five years.
Those investments could be good business moves and help feed into the broader economy. But they could also send share prices lower in the short term, as investors have become accustomed to companies using investment dollars to buy back their own stock, a popular move for corporations in recent years. Goldman Sachs analysts recently noted that corporations themselves represent the single largest source of demand for stocks in the United States.
Now, the combination of global growth and tax incentives to make capital investments “actually completely changed the paradigm to just borrow to buy back your stock,” said Mr. Rieder of BlackRock.
