What Triggered the Stock Market Panic This Month?
Rate hike realization
The recent rout in the equity market was fueled by concerns over rising interest rates, which could increase costs for the industry. Investor anxiety about rising rates was triggered by comments from San Francisco Fed president John Williams on Friday, February 2. During his speech, Williams said he envisioned three or four hikes this year, and investor anxiety escalated further after the non-farm payrolls report indicated impressive job gains in January. An improvement in the employment market coupled with an increase in inflation could prompt the US Federal Reserve to increase interest rates sooner than expected.
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Impact of this realization
The first effect of the realization of more interest rate hikes was seen in the US bond markets where the ten-year government bond yield rose to 2.9%, a level not seen since 2014. The already struggling bond markets reeled under pressure as the US yield curve steepened further after the reality of rising rates caught up with markets. The iShares 1-3 Year Treasury Bond (SHY), the 7-10 Year Treasury Bond (IEF), and the 20+ Year Treasury Bond (TLT), which track the performance of Treasury securities, lost 0.01%, 0.37%, and 0.93%, respectively, on February 2.
The key reflection of the panic is in the long-term rates, which have remained lower-bound for most interest rate hikes in 2017. Until last week, investors were convinced that the US Fed wouldn’t be able to continue raising rates as projected because of lower levels of inflation (TIP), but the hawkish tone at the January FOMC meeting and a stellar jobs report spoiled the party for bond market investors.
Interest rate hikes and the impact on stock markets
The fear of rising rates has been cited as a reason for the rout in equity markets. This worry stems from the fact that rates have remained close to 0% for a decade and only started moving higher since 2016. The pace of these rate hikes has been slow but steady, reaching a range of 1.3% to 1.5%. Increasing interest rates could result in higher borrowing costs for industries, which investors interpreted as reduced profit margins that could eventually lead to a decline in stock prices. In the next part of this series, we’ll discuss whether it’s fair to blame the bond (BND) markets for the fall in stocks.