Meltdown! Inflation Threat Triggers Stock Carnage
The inflation beast rattled its cage again today. Investors ran screaming.
The three main indices plummeted Monday, continuing last week’s sharp declines. Rising bond yields fueled the selloff in stocks. The threat of inflation haunts investors. They’re worried that the Federal Reserve might have to raise interest rates more quickly.
Friday’s U.S. payrolls report showed the fastest pace of wage growth in more than eight years. The Dow on Friday fell nearly 666 points.
Today, the Institute for Supply Management reported that its index of service sector employment hit 59.9 in January, a 13-year high. The job market is tight. Employers must pay more for workers. Wage growth stokes inflation; it also eats into corporate profits. The tax cut bill pours gasoline on the fire.
Investors also fear that Trump’s “America First” policies could spark a trade war. Tit-for-tat tariffs would undermine the global economy. Export-driven emerging markets would suffer.
Political risk is back, too. Special Counsel Robert Mueller’s Russia probe looms over the White House. Partisan rancor is worsening. Congress can’t get anything done.
Rising bond yields mean higher borrowing costs. They also present traders with alternatives. “Boring” bonds start to look attractive versus risky stocks.
A steepening yield curve indicates stronger economic activity and rising inflation expectations — and consequently, higher interest rates. The Fed has hinted that inflation may exceed its target of 2%. Consider this: after 20 years, inflation averaging the Fed’s target of 2% would slash a dollar’s buying power to 67 cents.
Today, as indices plunged, the CBOE Volatility Index (VIX) spiked 88.45%. Investors dumped stocks in all sectors.
The VIX (aka “fear gauge”) jumped 50% last week. That said, the Dow remains up nearly 40% since President Trump’s election. Recent declines could prove healthy, not the end of the world.
My son-in-law Ron and I share a passion for bad movies. We particularly enjoy ridiculing The Omen (1976), a horror film about Satan’s spawn. Perhaps you’ve seen this turkey. It’s rife with supernatural mumbo-jumbo.
A recurring theme in the film are the numerals 666. They’re supposed to represent the mark of the beast. The harbinger of End Times.
Ron called me last Friday, shortly after the market closed. With faux concern, he yelled: “The Dow just dropped 666 points! Armageddon! Sell stocks!”
He was kidding, of course. But it got me to thinking. People are, by nature, irrational. Subconscious fears influence investment decisions. In recent days, the Fear of Missing Out has given way to just plain old… fear.
Is it time for bargain hunters to jump in? Well, the carnage may not be over yet. And today, it was bloody indeed.
Monday Market Wrap
- DJIA: -4.60% or -1,175.21 points to close at 24,345.75
- S&P 500: -4.10% or -113.19 points to close at 2,648.94
- Nasdaq: -3.78% or -273.42 points to close at 6,967.53
Monday’s Big Gainers
- China Southern Airlines (NYSE: ZNH) +4.48%
Airline expands routes.
- Resolute Energy (NYSE: REN) +3.36%
Energy producer posts strong earnings.
- Guess? (NYSE: GES) +3.25%
Retail sales are strong.
Monday’s Big Decliners
- Kosmos Energy (NYSE: KOS) -13.66%
Analysts bearish on energy producer.
- Wells Fargo (NYSE: WFC) -9.22%
New compliance rules weigh on bank.
- Arconic (NYSE: ARNC) -8.91%
Materials firm disappoints on outlook.
Letters to the Editor
“Do short-sellers use social media to unfairly malign stocks?” — Lucian G.
Yes, sometimes they do. Social media can spread lies. Keep in mind the “fake news” of the 2016 election. This plague persists.
Not much can stop unethical traders from using social media to beat up a stock. They do it for a quick buck. It’s like insider trading. They short a stock, knowing that a hit piece is coming out.
Their profiles feature no headshots. They use pseudonyms. Anonymity is a giveaway; it’s a tactic of Internet trolls. Their attacks lack evidence. The lesson: Beware of hidden agendas.
Have you spotted examples of fake analysis? Let me know about it: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.