This is why the Dow is plunging

Stocks were pummeled on Friday and Monday. The ...

Posted: Feb 6, 2018 10:03 AM
Updated: Feb 6, 2018 10:03 AM

Stocks were pummeled on Friday and Monday. The Dow fell more than 1,800 points over two sessions. Here's what's going on.

1. Concerns that the Fed will raise rates

Stocks have been rising steadily since the election in part because the economy is so strong. Unemployment is historically low, and there are more open jobs than people to fill them.

Companies are starting to pay workers more to retain existing employees and attract new hires. Businesses will eventually have to raise prices on the stuff they sell to afford their growing payrolls. In economics, that's called inflation.

Though the economy has been growing steadily for almost nine years, inflation has remained stubbornly and mysteriously low. The Federal Reserve combats inflation by raising its interest rates. The central bank has been unable to significantly raise its interest rates over the past decade, fearing it could stymie the economic recovery and perhaps cause prices to fall.

The Fed planned on raising interest rates slowly this year -- just three times in 2018. But if inflation picks up, the Fed could raise rates more often and more steeply than it had planned.

2. Rising interest rates

When the Fed raises rates, the cost of borrowing money increases. That means companies have to pay more for their loans, which cuts into corporate profits. It also means Americans will pay more for mortgages and loans.

Another reason the stock market has risen so much over the past year has been the steady growth in corporate profits. Companies are healthy, and investors have rewarded them by pushing up their stock prices.

When interest rates rise sharply, stocks often fall. Investors worry that businesses' profit parade will slow down.

3. Worries about the bond market

Stocks have also been on a tear because they have been one of the only investments with a decent return. U.S. Treasury bond yields have been so low that many stock dividends are paying better.

But stocks are a higher-risk investment than bonds, which are backed by the United States Treasury. If bond yields start to rise, investors will want to take some of their money out of stocks and put it into safer bonds.

Sure enough, bond yields hit a four-year high Friday. (They pulled back a bit on Monday.) The recent tax bill has forced the Treasury to borrow more money, which will put more bonds into play. A supply glut could devalue bonds. Prices and yields move in opposite directions, and bond buyers will want a higher yield (and lower price) to make it worth their investment.

Inflation is bad for bonds, too. If borrowing costs increase, bond investors will want more return -- a higher yield.

Attractive yields on a safer investment have made stocks suddenly less attractive.

4. Too far, too fast

Stocks have been rising pretty much in a straight line since November 2016, and that's not exactly healthy. Stock market analysts believe the stock market is long overdue for a 5% pullback or even a 10% correction.

A cooling-off period would be a good thing. It would make stocks cheaper and more attractive to investors, especially if the underlying companies are healthy, cranking out strong sales and profits.

The market finally began to come down to earth -- just a bit -- this week, and investors wonder whether this is the beginning of a correction. There could be a little groupthink taking place in the downturn.

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 159036

Reported Deaths: 3879
CountyCasesDeaths
DeSoto10563104
Hinds10414204
Harrison7397113
Jackson6655128
Rankin6057107
Lee540396
Madison5120107
Forrest394786
Jones376188
Lauderdale3663147
Lafayette341053
Washington3321108
Lamar301950
Oktibbeha255262
Lowndes252867
Bolivar248084
Panola237353
Neshoba2280122
Marshall225051
Leflore211191
Monroe209778
Pontotoc208131
Lincoln200566
Sunflower194155
Warren183058
Tate180451
Union172926
Copiah170840
Pike166760
Scott161330
Yazoo161340
Itawamba159936
Alcorn159328
Pearl River158969
Coahoma155943
Prentiss154931
Simpson154053
Adams147252
Grenada145445
Leake141844
Holmes134461
Covington130040
Tippah130030
George129525
Winston128726
Hancock127641
Wayne123024
Attala122834
Marion121447
Tishomingo114043
Chickasaw110732
Newton110529
Tallahatchie99427
Clay96127
Clarke94853
Jasper87023
Stone82015
Calhoun79513
Walthall79330
Montgomery78426
Carroll75515
Lawrence74614
Smith74216
Yalobusha74228
Noxubee73317
Perry68726
Tunica63019
Greene62422
Jefferson Davis59617
Claiborne59216
Amite57615
Humphreys55219
Quitman5107
Benton50418
Kemper48018
Webster47714
Wilkinson40722
Jefferson38312
Choctaw3637
Franklin3635
Sharkey32917
Issaquena1214
Unassigned00

Alabama Coronavirus Cases

Cases: 256828

Reported Deaths: 3711
CountyCasesDeaths
Jefferson34214511
Mobile20299366
Madison13925150
Tuscaloosa13591156
Montgomery12659238
Shelby1095877
Baldwin9163137
Lee792566
Morgan710851
Etowah677467
Calhoun6695121
Marshall665757
Houston548239
DeKalb504738
Cullman472043
St. Clair451857
Limestone447546
Lauderdale436054
Elmore427564
Walker3818111
Talladega374457
Jackson350723
Colbert336443
Blount310043
Autauga287342
Franklin259734
Coffee254115
Dale242054
Dallas232932
Chilton230841
Russell22813
Covington227934
Escambia206131
Tallapoosa189191
Chambers185950
Pike162214
Clarke161819
Marion146136
Winston141924
Lawrence135336
Pickens127720
Geneva12638
Marengo125224
Bibb123938
Barbour120629
Butler118842
Randolph105922
Cherokee105524
Hale99732
Fayette96316
Clay93525
Washington93319
Henry8946
Monroe83811
Lowndes82129
Cleburne79914
Macon76522
Crenshaw72930
Conecuh72414
Lamar7138
Bullock70919
Perry6927
Wilcox64918
Sumter58922
Greene44218
Choctaw43519
Coosa3724
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