US stocks entered correction territory on Thursday as investors continued to brace for volatile market conditions underpinned by fears of rising inflation and higher interest rates.
The S&P 500 index fell 3.75% or 100.66 points to 2,581, the Dow Jones Industrial Average index was down 4.15% or 1,032.89 points to 23,860.46, while the Nasdaq Composite index slid 3.90% or 274.82 points to 6,777.16 at Thursday's market close.
Thursday’s losses follow a slight market rally on Wednesday during which the major indices pared losses after Monday and Tuesday's wild swings.
'The primary driver of today's decline is the same as it has been over the past week. Investors are reacting to rising interest rates - the 10-year Treasury rate rose to 2.88% this morning, partly due to today's 30-year Treasury auction and worries about larger federal deficits prompted by the proposed budget agreement to avoid a federal government shut-down tonight,' said Kate Warne, investment strategist of St. Louis-based broker-dealer Edward Jones.
Warne believes that the underlying reason for higher rates is good news from a long-term perspective, but that this does not prevent short-term volatility.
'Rising interest rates and elevated fears have produced a skittish stock market, with stocks rapidly swinging up and down, which we expect to continue in the short-term,' she said. 'However, when the fundamentals of economic and earnings growth are solid, declines are typically short-lived, and we think this is an opportunity to add equity investments at lower prices.'
Brian Jacobsen, senior investment strategist of multi-asset solutions for Wells Fargo Asset Management, said in a Thursday note that inflation might be to blame for what’s happening in the markets this week but that it should not serve as a headwind to equities long-term.
He said some of the market sell-off came from algorithms getting signals from market price changes, which then triggers selling.
‘With the flows into passive funds over the last few years, it’s likely that people who sold had to sell everything, rather than the individual securities they wanted to sell. That’s why the selling looked indiscriminate,’ wrote Jacobsen.
He urged investors to remain positive because with valuations as high as they were, a price decline without an earnings decline would mean valuations look better.
‘I think equities had asymmetric sensitivity to shifts in inflation expectations,’ he wrote. ‘It’s probably too early to say wage inflation is here to stay, as the latest report was likely distorted by minimum wage increases and one-off wage increases. And if inflation is rising, it will likely be at a very slow pace, which shouldn’t serve as a headwind to equities.’