(Reuters) - U.S. stocks turned sharply lower on Thursday, with investors still on edge as volatility in financial markets persisted and bond yields rose back toward levels that helped trigger the worst declines in more than two-and-a-half years earlier in the week.
U.S. benchmark 10-year Treasury yield earlier rose 2.8840 percent, just short of Monday’s highest level in four years, after the Bank of England said interest rates probably need to rise sooner, adding to expectations of reduced central bank stimulus globally.
The Dow Jones industrial average was down 635 points or 2.54 percent late afternoon. The S&P 500 was off 2.192 percent and the Nasdaq down almost 2.34 percent.
TRACIE MCMILLION, HEAD OF GLOBAL ASSET ALLOCATION STRATEGY, WELLS FARGO INVESTMENT INSTITUTE, WINSTON-SALEM, NORTH CAROLINA
“As we continue to add to the deficit, first with taxes, now with increased spending, and possibly with infrastructure spending, it adds up to better growth and higher GDP, but also potentially higher rates from the Federal Reserve. And it’s not just the Federal Reserve. Global banks are paring back the stimulus, and as that fixed-income supply comes to the market, there’s concern that there won’t be enough demand to pick up all that supply.
“We’ve all been anticipating this for a long time. We’ve seen the taper tantrum. Maybe this is the tightening tantrum.
IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK
“At this point a lot of it is about risk assets. People are watching the price action in stocks. It is circular. Higher rates lead to lower stocks and lower stocks lead to lower rates to some degree and we’re trying to figure out where the transfer mechanism from higher rates into slower growth potential is going to occur.
“Higher rates are going to slow the economy, we just don’t know when and we don’t know which rates to watch, and I think that’s the debate that’s currently playing out in the market. Higher rates also suggest that valuation should be lower in equities and I think that’s part of what’s playing out.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE
“Real estate, utilities and other interest rate sensitive sectors are not a good place to be. These sectors are going to do well when the market sells off. The knee-jerk trading reaction is that when the market sells off quickly the defensive sectors are the ones that sell off least.”
“People who are trying to buy those sectors now to protect themselves are making a mistake. I’d take this opportunity as they go higher to get out of them. When the market goes higher I’d rather be in financials, materials and technology.”
“I think volatility will continue in the short term. We’re seeing such large moves intraday. Until the markets begin to settle, and the dispersion of views is reduced, then we’ll keep seeing large bounces…Everyone’s uncertain about what happens next. Fundamentals are still positive, there is strong economic growth and strong earnings growth. Those will help stocks move higher over time. But it doesn’t do much for predicting short-term moves. We could see a bigger pullback before fundamentals take hold and stocks rise.”
JASON WARE, CHIEF INVESTMENT OFFICER & CHIEF ECONOMIST, ALBION FINANCIAL GROUP, SALT LAKE CITY, UT
“The market is trying to find a bottom to this madness. The market is trying to find the new normal that interest rates won’t be 2 percent on the 10 year anymore.
“The stock market doesn’t care so much about the absolutes of good or bad; but are things getting better or worse? As rates rise, things, as far as equity investors are concerned, are getting worse. Bonds are more competitive to stocks. But at (current levels) they are still not competitive, but it’s the direction. At 3.5 percent, they matter and are we are on the way to 3.5 percent.
“We haven’t been reallocating our portfolio in this environment. If the interest rate picture does tighten or the economy starts to slow, then maybe there will be changes but we don’t think the move … on the ten year warrants a shift.
BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST, ROBERT W. BAIRD & CO, SARASOTA, FLORIDA
“After the big rally we had in the first three weeks of January, optimism on the part of investors got too excessive. They were pretty fully invested, and liquidity became a problem. The markets were vulnerable to any kind of outside shock, and that outside shock turned out to be rising interest rates.
“I think this will continue for a while. We haven’t had a 10 percent correction in a number of years. I wouldn’t be surprised if we fell more than a full 10 percent, and then it’s possible that we would rally from there.”
ART HOGAN, CHIEF MARKET STRATEGIST, WUNDERLICH SECURITIES, NEW YORK
“This is how we started, go back to Friday and this is exactly where we were. The conversation about equity risk premium, interest rates and inflation — we are coming full circle. There will be something that breaks this vicious circle. Because you’ve got yields go up and the market tanks, then lo and behold as the market tanks the yields collapse. We went from 2.88 percent to 2.71 percent and the market stabilizes, starts to rise and yields go back up.
“The real endgame is to get some stabilization in both markets. We need to find a bottom in the equity market and a near-term top in the yield on the 10-year. Both of those things will happen.”
BRIAN BATTLE, DIRECTOR OF TRADING, PERFORMANCE TRUST CAPITAL PARTNERS, CHICAGO
“This is going to be typical. ‘Hurray volatility is back!’ ‘Boo volatility is back!’ This is a more normal trade. A one-way trade is not normal. Markets are supposed to go up and down. This is reasonable.”
“Higher rates are going to be the enemy of dividend paying stocks, which means utilities and REITs. Utilities are safer equities. It’s a very steady, low volatility, sector compared to tech. This isn’t over.”
QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY:
“This is part of - at least in the short term - the bottoming process. This is the way it works. We will look to see whether or not we see buying after the European close, and we will look to see which sectors are being bought.”
“The sectors that professional managers are buying suggests how they view the underlying economy and the underpinning for the market.”
RANDY FREDERICK, VICE PRESIDENT, TRADING AND DERIVATIVES, CHARLES SCHWAB & CO INC, AUSTIN, TEXAS
“I really don’t like how this market looks like right now. I don’t think we are done with the rout. The bounce that we got a couple of days in equities was just a trap for people to buy into. I’ve been telling people to wait for two solid up days and a drop in volatility. I think there is another downturn and another VIX spike coming. Part of this might have to do with short volatility strategies, we haven’t heard enough about those and I think there is more damage out there. With interest rates rising, it’s only going to make the thing worse.”
JIM VOGEL, INTEREST RATE STRATEGIST, FTN FINANCIAL, MEMPHIS, TENNESSEE
“Rates (are) responding to the Bank of England looking to accelerate its timetable on rate hikes and we’ve got yet another confirmation that a major central bank is wringing its hands over the possibility that economic growth is accelerating beyond current capacity.”
CHUCK CARLSON, CHIEF EXECUTIVE OFFICER AT HORIZON INVESTMENT SERVICES IN HAMMOND, INDIANA
“Usually these kinds of blasts aren’t one or two or three day things. Then you start having pretty much all investors trying to reassess both their risk level as well as what is happening in the market to cause this. Is it basically computer driven? Is the fear of inflation going to be a legitimate fear going forward? All these things.”
“Consequently what happens is you get volatile markets like this. The volatility doesn’t stop in a day or two. It continues to kind of go on. Because I think people are still searching for the idea of how short term is this thing going to be.”
“There are two things on the table that are really driving the concerns. It’s rising yields and inflation worries. Inflation can really crimp multiples and that’s something that greatly affects stocks, and then interest rates, price in the attractiveness of alternatives and that can affect it.”
BONDS: The 2- US2YT=RR Treasury note yield was up slightly at 2.1339 percent, while the 10-year US10YT=RR bond yield was last at 2.8512.
FOREX: The dollar index .DXY was off 0.03 percent
VIX: The Cboe volatility index .VIX was up almost 16 percent at 32.06.
Americas Economics and Markets Desk; +1-646 223-6300