Dow dives more than 1,000; Fed tries to calm investors

By Jim Puzzanghera / Los Angeles Times

WASHINGTON — Stocks plunged again Thursday, with the Dow Jones industrial average diving more than 1,000 points for the second time this week despite attempts by Federal Reserve officials to calm nervous investors.

The Dow is down 10 percent from the record high it hit in late January — the level considered a market correction. The broader Standard & Poor’s 500 index and the technology-focused Nasdaq composite closed Thursday near correction levels as well.

Such 10 percent adjustments are frequent occurrences, analysts said, but the speed with which it has happened after a long stretch of record-breaking market highs can be unsettling to average investors.

“Corrections normally can take weeks to develop, and this clearly developed in a few days,” said Brett F. Ewing, chief market strategist at research firm First Franklin Financial Services.

“I would tell the average person to stay calm, do not react, especially off your emotions watching this right now,” he said. “When people go through extended periods of low volatility and they see this, it can make it feel even bigger than it really is. The underlying fundamentals of the economy are really strong.”

But it’s that strength, particularly rising wages in a tight labor market, that is driving fears that interest rates will start rising more quickly than anticipated to keep the economy from overheating.

The Dow dropped 1,032.89 points Thursday, it’s second-largest point drop, to 23,860. The largest point drop was just three days ago, when the Dow plunged 1,175 points.

But because the Dow has reached such high levels, the percentage drops are well below those seen in the 2008 financial crisis and other market crashes. Thursday’s decline was 4.2 percent.

The S&P 500 dropped 3.8 percent, and the Nasdaq was down 3.9 percent.

“We haven’t seen volatility like this certainly in the past two years,” said Brad McMillan, chief investment officer at brokerage firm Commonwealth Financial Network, who added that the declines are part of a normal adjustment in stock prices after a long stretch of indexes setting multiple records.

“All of a sudden, investors as a group realized that the risk is there, and they’re adjusting price to reflect that,” he said. “I think it’s a healthy development.”

Stronger economic growth, fueled in part by large tax cuts enacted at the end of last year, along with a bipartisan federal budget deal struck by Senate leaders this week that will boost spending, has led to fears that interest rates will rise more quickly than anticipated to head off inflation.

The Republican tax cut bill already was set to push the federal budget deficit close to $1 trillion in the 2018 fiscal year, which began Oct. 1, and the new two-year budget deal will propel it higher.

Increased federal borrowing drives up interest rates on bonds. The yield on the benchmark 10-year Treasury bond was up Thursday to 2.83 percent, near a four-year high.

William Dudley, president of the Federal Reserve Bank of New York, sought to downplay the recent market moves, calling them “small potatoes.”

“The little decline that we’ve had in the equity market today has virtually no implications for the economic outlook,” Dudley, who is vice chairman of the Fed’s rate-setting committee, told Bloomberg TV.

He said the Fed’s most recent forecast, in December, of three more small increases in the central bank’s benchmark short-term interest rate “still seems like a very reasonable projection,” he said.

His comments came after another member of the Fed’s committee said Wednesday night that he also was still anticipating a gradual increase in interest rates.

“At this point, I don’t see any of the movements in asset prices of late to fundamentally change my view of the economy,” John Williams, president of the Federal Reserve Bank of San Francisco, told reporters after a speech in Hawaii.

“I think the economy is on a very solid growth path,” he said. “In fact, I think some of the market reaction is to the fact that the economy is doing well.”

Still, after a long streak of record-breaking stock market gains, pessimism is growing.

The percentage of individual investors expecting stock prices to drop is at a three-month high of 35 percent, according to weekly survey results released Thursday by the American Assn. of Individual Investors. The figure dropped 7.7 percent from the previous week and had been only 16 percent at the start of the year.