For most of 2018, the stock market has continued its upward ascent that began after the end of the last recession and which has only accelerated since the election of President Donald Trump. On Friday, February 2, that all changed, however. The Dow Jones Industrial Average dropped from its recent highs to shed 666 points on the day.
The drop came in spite of better-than-expected numbers on the jobs front. Overall, the total job number grew by 200,000 in January. This positive development was offset by concerns over inflation as the average wage increased over December’s number. This caused interest rates on the 10-year Treasury bonds to rise to a four-year high of 2.85 percent. This is a large increase on a rate that was at just 2.4 percent as recently as the first of the year.
The 666-point drop was 2.5 percent, which was the largest since the concerns over Brexit rippled across the market in the summer of 2016. In terms of the number of points lost, this was the biggest one-day decline since the financial crisis and recession back in 2008. It was easily the largest drop of the Trump presidency, which is slightly more than a year old. The drop also caused the VIX, which measures market volatility, to increase by 55 percent over the course of the past week.
Some investors have worries that higher interest rates on bonds will make equities less attractive as interest rates come to exceed quarterly dividend payments. Additionally, higher interest rates make borrowing more expensive. This could lead to an economic slowdown as people and companies are less likely to invest in real estate and equipment.
There is also a concern that higher wages will lead to a decline in corporate profits, which would, in turn, cut into the rate of growth on stocks. Even with the major drop, however, the broader S&P 500 index is still only 3.9 percent lower than its recent all-time highs.