US stocks swoon, sending Dow down more than 650 points

U.S. stocks slumped Friday, and the market suffered its worst week in two years, as fears of inflation and disappointing quarterly results from technology and energy giants spooked investors. The Dow Jones industrial average dropped by more than 650 points.

Bond yields rose and contributed to the stock market swoon after the government reported that wages grew last month at the fastest pace in eight years. The Dow had its worst decline since June 2016, while the broader Standard & Poor’s 500 index had its biggest one-day percentage drop since September 2016.

“We’ve enjoyed low interest rates for so long, we’re having to deal with a little bit higher rates now, so the market is trying to figure out what that could mean for inflation,” said Darrell Cronk, head of the Wells Fargo Investment Institute.

The increase in bond yields hurts stocks in two ways: it makes it more expensive for companies to borrow money, and it also makes bonds more appealing to investors than riskier assets such as stocks.

Several major companies, including Exxon Mobil and Google’s parent company, Alphabet, sank after reporting weak earnings. Apple fell on concerns about iPhone sales.

The sharp decline in stocks this week short-circuited a robust start to the year that was spurred by strong global economic growth, solid company earnings and lingering enthusiasm for the GOP tax overhaul. Even with the pullback, the major indexes are still up more than 3 per cent this year.

The downturn also follows a long period of unprecedented calm in the market. Stocks haven’t had a pullback of 10 per cent or more in two years, and hit their latest record highs just one week ago.

The S&P 500 fell 59.85 points, or 2.1 per cent, to 2,762.13. The index has lost 3.9 per cent since hitting a record high a week ago.

The Dow lost 665.75 points, or 2.5 per cent, to 25,520.96. The Nasdaq slid 144.92 points, or 2 per cent, to 7,240.95. The Russell 2000 index of smaller-company stocks gave up 32.59 points, or 2.1 per cent, to 1,547.27.

While interest rates are still low by historical standards, meaning borrowing is still relatively cheap for businesses and people, they’ve been rising more swiftly, and that’s what has markets on edge.

“The pace of rate increases is more important than the level,” said Nate Thooft, senior portfolio manager at Manulife Asset Management.

The increase in rates has been driven by the prospect of stronger economic growth, and higher inflation, in the U.S. and abroad.

Bond prices declined again Friday, pushing yields higher. The yield on the 10-year Treasury note, a benchmark for interest rates on many kinds of loans, including mortgages, climbed to 2.84 per cent, the highest level in roughly four years. The rate was at 2.41 per cent four weeks ago and 2.66 per cent on Monday.

“Once we started going north of 2.5 per cent, and you put that together with an overbought market, it had the ingredients of a sell-off, especially since January was so strong,” said Jeff Zipper, regional investment strategist at U.S. Bank Private Wealth Management.

The S&P 500, which many index funds track, soared 5.6 per cent in January, its biggest monthly gain since March 2016.

One concern for investors is that the Federal Reserve will respond to higher inflation by raising its key interest rate more quickly than expected. The government’s latest job and wage data stoked those concerns Friday.

U.S. employers added a robust 200,000 jobs in January, slightly above market expectations for an 185,000 increase. Meanwhile wages rose sharply, suggesting employers are competing more fiercely for workers. The figures point to an economy on strong footing even in its ninth year of expansion, fueled by global economic growth and healthy consumer spending at home.

That’s good news for Main Street USA, but not for Wall Street. Some economists were predicting Friday that the central bank will raise its benchmark rate four times this year, rather than the three times most previously expected.

The market slide may have been overdue, particularly after the strong start for stocks this year where the S&P 500 had its best January in two decades. Some investors saw a potential buying opportunity.

The global economy is still strong, corporate profits and sales have been better than expected this reporting season and buyers for stocks still remain, all reasons to be optimistic about stocks, said Nate Thooft, senior portfolio manager at Manulife Asset Management.

“It’s appealing, these 2 to 3 per cent pullbacks,” said Thooft, who had been trimming some of his stock holdings after the market’s big January gains. “We look at this and say, ‘Maybe it’s your first day to buy a little bit.’”

While earnings overall have been strong, some big companies have posted disappointing results.

Google’s parent company Alphabet slumped 5.3 per cent after the search giant reported results that missed analysts’ forecasts. The stock slid $62.39 to $1,119.20.

Exxon Mobil dropped 5.1 per cent, while Chevron lost 5.6 per cent after the oil companies’ latest quarterly results fell short of forecasts. Shares in Exxon shed $4.54 to $84.53. Chevron gave up $6.99 to $118.58.

Apple declined 4.3 per cent after the technology company said it sold 77.3 million iPhones in the last quarter, below the 80 million analysts expected. The stock slid $7.28 to $160.50.

Traders welcomed Amazon’s latest results. The e-commerce giant rose 2.9 per cent after its fourth-quarter profit increased by more than $1 billion. Amazon shares gained $39.95 to $1,429.95.

Oil futures declined. Benchmark U.S. crude slid 35 cents, or 0.5 per cent, to settle at $65.45 a barrel on the New York Mercantile Exchange. Brent crude, used to price international oils, fell $1.07, or 1.5 per cent, to close at $68.58 a barrel in London.

Wholesale gasoline fell 2 cents to $1.87 a gallon and heating oil fell 4 cents to $2.05 a gallon. Natural gas slipped 1 cent to $2.85 per 1,000 cubic feet.

Gold fell $10.60 to $1,337.30 an ounce. Silver dropped 45 cents to $16.71 an ounce. Copper lost 2 cents to $3.19 a pound.

The dollar rose to 110.28 yen from 109.42 yen on Thursday. The euro weakened to $1.2451 from $1.2502.

Major stock indexes in Europe also declined Friday. Germany’s DAX slid 1.7 per cent, while France’s CAC 40 lost 1.6 per cent. The FTSE 100 index of leading British shares gave up 0.6 per cent.

In Asia, Japan’s benchmark Nikkei 225 fell 0.9 per cent and South Korea’s Kospi slid 1.7 per cent. Hong Kong’s Hang Seng index dipped 0.1 per cent.

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AP Business Writer Stan Choe in New York contributed to this report.