An overnight rebound in equities evaporated Monday morningand investors were wondering how deep the sell-off in equities will get.
U.S. stock indexes resumed their decline after a seven-hour bounce. Concern keeps swirling over encroaching inflation and surging bond yields that last week sent major benchmarks to their worst week in two years. The S&P 500 Index fell 0.8% as of 9:48 a.m. in New York. The Nasdaq 100 Index slipped 0.7% and the Dow Jones Industrial Average slid 1%.
"When you have a bad Friday and an indication of a bad Monday, it can cause some additional selling panic, even though on a fundamental level the economic backdrop is still strong,'' said Tim Ghriskey, managing director at Solaris Asset Management. "Selling can cause more selling, and that can cause more danger for the economy, if the stock market has a major correction simply because everyone wants to sell."
Weakness in futures "is a departure from the frequent overnight ramps in this long bull market," Brian Frank, portfolio manager at Key Biscayne, Fla.-based Frank Capital Partners. "Fixed income, cryptos, and international markets are all moving together. The broadness of the move and the aggressiveness of investors positioning explains the general unease."
Equity indexes in Japan, Australia and New Zealand sank at least 1.5% in Asian trading, while yields on 10-year Treasury notes hovered near 2.83% after climbing above 2.88% earlier in the day.
Before last week, a steady rally powered partly by optimism over Donald Trump's tax cuts pushed stock valuations to some of the highest levels since the internet bubble. Stocks have been in rally mode for the better part of nine years, propelled by stimulus enacted by the Fed to restore the economy after the financial crisis.
"We are not concerned about a sustained move lower in stocks near term," Dennis Debusschere, head of portfolio strategy at
Evercore ISI, wrote in a note to clients over the weekend. "What we can't discount is how much money invested in low volatility and long duration trades could unwind," he said. "If risk parity, CTA and other short volatility trades begin to unwind, it could cause market stress that would overwhelm fundamentals near term."
Speaking on CBS's "Sunday Morning," outgoing Fed Chair Janet Yellen said U.S. stocks and commercial real estate prices are elevated but stopped short of saying they're in a bubble. The S&P 500 has gained 85% since she took office in February 2013.
"Well, I don't want to say too high. But I do want to say high," Ms. Yellen said on CBS's "Sunday Morning" in an interview recorded Friday as she prepared to leave the central bank. "Price-earnings ratios are near the high end of their historical ranges."
Signs of nervousness were everywhere on Friday, when the Cboe Volatility Index jumped 29% to cap a weekly increase that roughly matched its surged in August, when concern about tech stock valuations pushed the Nasdaq 100 down for four straight weeks. As traders rushed to hedge on Friday, options volume on the VIX exceeded the previous record by 39%, with 4.3 million contracts traded.
The volatility gauge rose again Monday, climbing 7.7% to 18.64. All major industry groups in the S&P 500 fell, except for real estate shares, with financial and energy stocks dropping the most.
Last week's retreat, the first of 2018, came amid a crush of signals that would ordinarily be bullish for investors, including record inflows into mutual and exchange-traded funds and frenetic account openings at discount brokerages. Chris Harvey, the head of equity strategy at
Wells Fargo & Co., said clients were mostly calm during Friday's 666-point plunge in the Dow Jones Industrial Average.
"We're not really hearing and seeing the fear on the other side of the phone," Mr. Harvey said in an interview Friday. "There's a behavioral issue about this. If you sold over the last 12 and 24 months, you've come to regret that. So what we saw in the second half of 2017 was more or less a sellers' strike where people didn't want to reposition and didn't want to sell because it was basically ripping up money.
