U.S. equities closed down sharply, with the S&P 500 Index losing more in one day than it had in six years, as investors fretted that rising inflation will spell a quick end of a decade of easy money policies.
The S&P 500 Index closed down 4.1% to 2,648.43, slightly moderating a 4.3% drop earlier in the day. Market volatility, which had been relatively low over the past year, suddenly spiked. The CBOE Global Markets Volatility Index, a measure of investor expectations that stock markets could move quickly and unexpectedly, jumped 116% to 37.32, the highest it has been since a few days before the U.S. presidential election in November 2016.
Investors are apparently concerned that the return of inflation, which has lagged the global economic recovery, could lead central banks to raise rates faster.
The U.S. dollar, which had been in a yearslong decline, turned higher, with the Dollar Index rising 0.37% to 89.56. The benchmark 10-year Treasury bond, which had hit a 52-week high of 2.883% earlier in the day, declined to 2.709%, as investors sought safe havens from equities.
Individual equities with market-moving news also got caught up in the decline. Wells Fargo & Co. slid more than 8% as investors reacted to Federal Reserve sanctions announced late Feb. 2. Even chipmaker Qualcomm Inc.'s shares lost 6.57% to $61.73, despite the company receiving a sweetened $82-per-share offer from competitor Broadcom Ltd., in a deal worth $103 billion.
In Europe, the FTSE 100 closed down 1.4%, and the Stoxx Europe 600 lost 1.6%. The day's rout had started in Asia, as markets there reacted to Feb. 2 declines in the U.S. Japan's Nikkei 225 closed down 2.55%, while Hong Kong's Hang Seng Composite Index retreated 1.2%.
The selloff began last week after a stronger-than-expected U.S. employment report showed that 200,000 jobs were added in January. With a robust economy and an uptick in wages, analysts began to suggest that the Federal Reserve might accelerate monetary tightening. The S&P 500 fell 2.12% on Feb. 2 and posted its biggest weekly loss since 2016.
Analysts were reluctant to call an immediate end to the long bull market, however.
"I do think it's likely this business and market cycle will end at some point over the next 1-3 years," Patrick Chovanec, chief strategist at Silvercrest Asset Management, wrote on twitter. "But it won't just come out a clear blue sky, in defiance of pretty solid growth numbers and relatively modest inflation."
Arnim Holzer, macro and tail risk strategist for EAB Investment Group, said in a research note that while he did not expect a repeat of 2008, when deep losses were driven by the subprime mortgage crisis, he viewed today's markets as a return to more normal volatility.
"I think investors should look to profit from the more substantively volatile environment," he wrote.
