A day after suffering its worst fall of 2018, the Dow slid more than 300 points Tuesday, the first signs of selling after the blue-chip stock gauge rallied nearly 1,900 points in the first 18 trading days of the year.
In early trading, the Dow Jones industrial average fell as much as 340 points, or 1.3%, and was on track for its first back-to-back triple-digit point losses since April, and its worst one-day point drop since May 17, 2017.
The Dow, which gained 25.1% last year, got off to a bullish start to 2018, hitting new all-time highs in 11 of the year’s first 18 trading days and rising as much as 7.7%.
It has been a long time since the U.S. stock market has suffered a decline of any real magnitude. The last pullback of 5% or more, for example, dates back to June 2016 in the aftermath of Britain’s vote to exit the European Union, a political shock dubbed Brexit.
Monday’s 177-point fall was blamed on rising long-term interest rates. Tuesday’s drop has been caused in part by investors selling shares to lock in profits after the big rise at the start of the year.
The yield on the 10-year Treasury note jumped as high as 2.736% today, its highest level since April 22, 2014, or nearly four years ago. Higher borrowing costs slow economic growth.
Also weighing on stocks was news that Amazon, Berkshire Hathaway and J.P. Morgan, which are led by powerful CEOs Jeff Bezos, Warren Buffett and Jamie Dimon, are teaming up to create an independent company that will utilize technology to deliver “simplified, high-quality and transparent” health care to employees at lower prices. The threat of potential disruption in the health care industry caused a big selloff in health care stocks.
UnitedHealth Group, for example, a Dow component, was down $13, or 5.3%, to $234.41, a drop which accounted for nearly one-third of the Dow’s overall drop Tuesday. More broadly, the iShares U.S. Healthcare Providers ETF, which includes managed care companies such as Anthem, Aetna and Cigna, was down 2.3%.
Those are some of the reasons why Gary Kaltbaum, president of money-management firm Kaltbaum Capital Management, wasn’t surprised by the Dow’s recent dip.
A market breather was long due, he says.
“Markets do go down every now and then,” Kaltbaum reminded investors. “And prices in the short-term, have been stretched and extended as far as we have seen in ages.”
The early-year rise has been driven by investor optimism over a growing global economy and U.S. stock analysts raising their profit expectations for U.S. companies following the passage of a new tax law that cut the corporate rate to 21% from 35%.
Barry Bannister, a market strategist at money management firm Stifel, is telling clients that he expects a 5% drop for stocks in the first quarter of 2018, citing challenges from rising interest rates.
The combination of a stock market that is trading at a valuation roughly 20% higher than its long-term average, one that hasn’t suffered a sizable drop in nearly 19 months and rising interest rates due to an improving economy appears to be finally taking its toll, adds Bill Hornbarger, chief investment officer at Moneta Group.
“Equities have been on a tear and some profit taking and resetting of portfolios would be natural,” Hornbarger said. “The market appears to be overdue a correction and it wouldn’t be a great concern if a 10% correction happened. But trying to figure out the timing of one is virtually impossible.”
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