MANHATTAN (CN) — Once again, markets were rattled by an influx of investors into GameStop stock and inflationary concerns, as indices fell quickly on Thursday.
Losses began early, with the Dow Jones Industrial Average shedding about 200 points in the first hour of trading. By the closing bell, the Dow finished down 561 points, a 1.7% decrease, while the S&P 500 and Nasdaq had even worse outings, falling 2.4% and 3.5%, respectively.
The rout cut deeply into the gains from Wednesday, when the Dow hit a new record of 31,961 points. The S&P 500 and Nasdaq had closed out that day’s trading by inching back to their previous record highs, as well.
One early indicator that Wall Street was in for a wild ride was the sudden increase in GameStop shares. Shares of the video game company began to soar late Wednesday and continued on Thursday. While the company’s shares at one point rose 60%, GameStop ended the day’s trading up 18%.
The rapid gains gave some investors an eerie sense of déjà vu from earlier this month, when a motley crew of investors pumped the value of the company’s stock to both reap quick gains and punish hedge funds that had taken short positions, causing the Dow to lose more than 1,000 points in a week.
A second run on GameStop wasn’t the only thing that sent Wall Street for a wild ride on Thursday, as the bond market caused a flurry of concern, as well.
The 10-year Treasury yield broke past 1.6% on Thursday, the highest it has been since more than a year ago, while the 30-year Treasury increased to 2.29%. Meanwhile, the yield on seven-year notes hit 1.195% after an auction, which only helped fuel concerns on Wall Street.
Bonds and stocks usually go in opposite directions; when bond prices rise, stock prices drop due to the assumption that future cash flows will be discounted at a higher rate, and vice versa. However, bond yields will expand when investors believe the economy is improving, making the latest disparity between equities and bond yields indicative of underlying investor concerns.
Peter Boockvar, chief investment advisor at Bleakley Advisory Group blamed the current bond situation partly on the Federal Reserve, which “is in the process of losing control of the bond market, and if they lose that they will also lose the faith of the stock market, and they they’ll be completely impotent.”
In testimony before Congress earlier in the week, Fed Chairman Jerome Powell again stressed the central bank had no plans to raise interest rates or back off securities purchases anytime soon. Powell added that the Fed wants to see inflation rise moderately above the 2% mark “for sometime” before tightening its belt and getting ou8t of the asset-purchase arena.
Boockvar is a frequent critic of the Federal Reserve’s recent quantitative easing. He said “the only way they get back in control is to stop sounding so dovish” and “less dismissive of the possibility of higher inflation, less dismissive of the risks of ‘running the economy hot.’”
This week, several other Fed officials have reiterated the central bank’s dovish position, stressing that inflation is not a concern and reassuring investors investment rates would remain at historic lows.
During a speech before the U.S. Chamber of Commerce on Wednesday, Vice Chair Richard Clarida said “inflation is running at just 1.5%” and once again said the Fed’s approach to “flexible inflation targeting” to keep it on a 2% average.
Governor Lael Brainard also noted in a speech at Harvard University earlier this week that inflation was still not a concern for the central bank. “Inflation remains very low, and although various measures of inflation expectations have picked up recently, they remain within their recent historical ranges,” he said.
Market concern about inflation has drowned out other economic indicators, however. Good news from the Labor Department — that new unemployment claims came in lower than anticipated — was not enough to reverse the rout. According to the agency, just 730,000 new claims were filed for the week ending February 20, less than the 825,000 many had predicted.
“The drop may be signaling a turning point for labor market conditions,” Nancy Vanden Houten of Oxford Economics wrote in an analysis, noting that backlogs and fraud continue to create “noise” surrounding the true employment situation. “We expect a more sustainable labor market recovery to take hold closer to mid-year with broader vaccine distribution and the arrival of more fiscal support.”
Fiscal support, in the form of another stimulus package, remains the predominant issue on investors’ minds.
The Biden administration’s $1.9 trillion legislative proposal, which is roughly 9% of the country’s GDP, has had some worried about inflation.
“We wouldn’t be foolish enough to claim another massive fiscal stimulus would make a bout of higher inflation unavoidable,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a white paper. “But it does increase the risks considerably at a time when other factors were already pointing to a rebound.”
Ashworth continued that the Fed’s activist monetary policy also will cause higher inflation. “Fed officials appear to have convinced themselves that, until proven otherwise, any rise in inflation should be ignored as ‘transitory,’” he wrote. “Furthermore, this massive third dose of fiscal stimulus would be coming at a time when inflationary pressures already appear to be building.”
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