Dow Drops 500+ Points As Bond Yields Creep Higher

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On Monday, the Dow recorded its largest ever single-day plunge, dropping more than 1,100 points by the time markets closed, but it recovered more than 560 of those points Tuesday.

Torsten Slok, chief worldwide economist at Deutsche Bank, told the Financial Times: "Markets are coming to the conclusion that the USA economy is close to overheating and therefore that the risks of inflation are bigger than the risks of a recession".

A wild session on Tuesday saw the Dow Jones Industrial Average swing more than 1,100 points from peak to trough and ended with the benchmark S&P 500 tallying its best day since just before President Donald Trump's election in 2016. After numerous turns higher and lower, it wound up with a gain, coincidentally, of 567. Many market watchers had predicted such a fall, saying stock prices had become too expensive relative to company earnings.

The market's pullback came amid concerns about rising bond yields and higher inflation. As a result, the biggest losses went to high-dividend companies such as utility and real estate companies, which investors often buy as an alternative to bonds.

While investors may still be uncertain about where stocks are going, they are not rushing for cover in ultra-safe investments like bonds.

On Thursday, the yield on the 10-year Treasury note again ticked up to a recent four-year high of 2.88%, sparking fears that rates could quickly top the key 3% level.

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Stocks posted sharp losses Thursday with the Dow shedding 1,033 points, as higher interest rates continued to rattle investors. The Nasdaq Composite was down 274 points, or 3.9%, at 6,777.

The recent rout in the stock markets has wiped about $4 trillion off world equities. The Dow is up 24 percent over that time, the S&P 500 18 percent. The S&P 500 rose 1.7% to 2,695. That's less than the 10 percent drop that is known on Wall Street as a "correction".

Financial analysts regard corrections as a normal market event but say the unusually abrupt plunge might have been triggered by a combination of events that rattled investors. It has been an uncommonly long time since the last market correction, which ended nearly two years ago. "There was euphoria because there hadn't been a pullback", said Jeffrey Schulze, investment strategist at ClearBridge Investments. "The No. 1 rule of investing is not to lose money that's outside your risk profile and to have a discipline of why you're in the market and have a sell discipline in your mind", he said. "People will be afraid now of shorting volatility".

After huge gains over the course of 2017 and a January jobs report that showed significant wage increases, analysts became anxious the Federal Reserve would hike interest rates sooner than expected, causing market volatility as investors looked to lock in gains. That strong pay data sparked fears of coming wage inflation, which intensified worries that the Federal Reserve could hike rates more often this year than the three times they have originally signaled.

Stocks have also been on a tear because they have been one of the only investments with a decent return. "Is there more inflation down the road than we're expecting?" Schutte said that as central banks stop propping up the market, trading will probably be more volatile in the next few years.

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