Nation/World

Stock markets tumble more than 660 points, spelling end to long upward run

For much of the last year, the stock market glided higher, lifted by solid economic growth and corporate profits, low interest rates and few signs of inflation.

That smooth ride might now be ending.

The Standard & Poor’s 500-stock index fell 2 percent on Friday, ending its worst week in two years. The Dow Jones industrial average tumbled more than 660 points, or about 2.5 percent.

The catalyst for Friday's fall appeared to be a government report that showed the strong U.S. economy might finally be translating into rising wages for U.S. workers.

While rising pay is good for workers, it also can be a sign that inflation is coming. And investors worried it could prompt the Federal Reserve to raise interest rates faster than expected. That is unnerving for investors accustomed to the last decade's rock bottom rates.

"It's a legitimate concern, when inflation spikes up a little bit, that people should evaluate how is this going to affect profits and how is this going to affect the Fed," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. "The market is becoming more vigilant around these concerns, and that's good and that's healthy."

That is not to say the market is collapsing. Even after this week's sell-off, stock markets remain at historic highs. The S&P is still 22 percent above where it stood a year ago.

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Friday's jobs report showed average hourly earnings rose 2.9 percent in January from a year earlier, the fastest growth in years.

But even before Friday's news, other financial indicators were moving in ways that suggested the end could be in sight to a prolonged period of eerily calm, happy markets.

Interest rates recently have leapt sharply higher. The yield on the 10-year Treasury note — a widely used gauge for overall interest rates — rose to more than 2.8 percent, the highest level since early 2014.

Rising rates have myriad consequences, including making it more expensive for companies and individuals to borrow money. Interest rates on mortgages, for example, are going up as a result.

In one sign of a shift underway, a measure of expected market turbulence, the CBOE Volatility Index, jumped by more than 15 percent Friday. The "VIX" has spent months at historically low levels, reflecting the buoyant market mood but mystifying many investors.

Sharply rising interest rates would be a stark change after a decade of "easy money" — low interest rates and other forms of financial stimulus — from the world's central banks.

Since stocks began climbing during the depths of the Great Recession in 2009, their rise has been supported by some of the lowest global interest rates seen since World War II. Amid piddling economic growth, central bankers around the world slashed interest rates. Their goal was to incentivize investors to put their cash to work in the economy — such as by buying corporate stocks and bonds — rather than stashing it in the relative safety of government bonds.

The theory was that investments in stocks and bonds would make it easier for companies to raise money, invest and hire workers as the global economy healed.

Economists are still debating how well that worked. But a decade later, the global economy is improving across the board. Japan, the eurozone and China are all enjoying stable, sustainable growth.

The U.S. economy expanded by a 2.6 percent annual rate in the fourth quarter of 2017. That is below the pace of some past expansions — the economy grew at around 4 percent annually in the late 1990s. But it is enough to keep creating significant numbers of jobs, including 200,000 in January.

The ongoing expansion should be a comfort to investors, some observers say, because higher revenue allows companies to offset rising costs, such as workers' pay, because of inflation.

"If we start to see growth slowing and inflation acceleration, that's when I get concerned," said Erin Browne, head of asset allocation at UBS Asset Management. "As long as growth continues to improve, a little bit more inflation that we're seeing now is fine."


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