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Stock investors’ hearts skipped a beat in February.
It wasn’t cupid messing with their emotions, but a sudden and sizable dive in stock prices that caused the U.S. market to finish the month with a loss, snapping a streak of 10 straight monthly gains.
The Standard & Poor’s 500 index, a broad gauge of stocks, ended February down 3.9%, its first monthly loss since March 2017, which left it just shy of an 11-month streak in 1958, according to S&P Dow Jones Indices. The fall was also its biggest monthly decline since January 2016, when investors stepped back from stocks because of concerns that China’s economy was in danger of a major contraction.
This February was a turbulent period, which saw the return of wild price swings for stocks after a long period of calm. The volatility — including two days in which the Dow Jones industrial average suffered record point drops of more than 1,000 points — was set in motion by fears that borrowing costs would spike more than expected this year, threatening to slow growth for the economy and stocks.
The stock market decline at the start of the month was swift and startling, a 10.16% fall in the S&P 500 over a nine-session span ending on Feb. 8, resulting in the market’s first correction — defined as drop of 10% or more — in two years.
To be sure, the market has recouped a big chunk of its losses and has climbed back into positive territory for the year. A 401(k) investor that started the year with $100,000 invested in the S&P 500 would have seen his or her account balance swell to $107,453 by late January’s peak, only to sink to $96,536 at the low for the year. At the end of February, that initial investment was still showing a gain of about $1,500.
The shift in the market’s tone is viewed by many as a sign of change in financial markets.
So what changed?
Return of volatility
Overall, the stock market has been on a steady rise for more than a year with few hiccups along the way. Big market drops were absent, as was investor fear. But volatility came roaring back recently as rate-hike worries intensified.
The S&P 500’s longest-ever period without a 3% drop, dating to November 2016, was snapped Feb. 3, according to Bespoke Investment Group. The large-company stock index also suffered its first 5% drop since late June 2016 when stocks tanked after the surprise vote by Britain to exit the European Union. The S&P 500’s first correction in two years followed Feb. 8.
Similarly, the VIX, a closely watched Wall Street fear gauge that also measures how much volatility investors think there will be in the future, shot up more than 100% in a single day during the market panic in February, its biggest jump ever.
“We saw a tsunami of volatility,” said Paul Schatz, president of Heritage Capital, a Woodbridge, Conn., investment firm.
Rising borrowing costs
After years of support from record low interest rates since the 2008 financial crisis, the market is now coming to grips with the reality that an improving economy and job market will lead to higher inflation — and higher borrowing costs. Higher interest rates slow consumer spending and crimp growth, making stocks less desirable.
The 10-year Treasury note, a benchmark borrowing rate that determines the cost of mortgages and other consumer-related debt, has spiked from around 2.40% at the end of 2017 to about 2.90%. The recent run-up in long-term bond yields gained speed on Feb. 2 after the government reported that average hourly wages grew at their fastest pace since 2009.
“Investors said, ‘Oh gosh, rates are going to start rising,’” explains Brian Jacobsen, senior investment strategist for Wells Fargo Asset Management.
Investors also worry that the Federal Reserve will raise short-term rates too aggressively this year. That concern gained credence Tuesday when the new Fed chief, Jerome Powell, told a congressional panel that he believes the economic outlook has improved since the central bank last met in December. Powell’s words were interpreted by Wall Street as a sign that the Fed might hike rates four times this year, not the three they have already signaled.
Reminder: Stocks go down
When stocks go up pretty much in a straight line, like they did in 2017 when the S&P 500 rose 19.4%, and early this year, when it rose another 7.5%, investors forget they can be risky and can actually go down.
The February swoon dissuaded them of that erroneous notion.
“It was the first time the latest generation of investors realized that they can lose money and lose it quickly,” Schatz says.
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