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Historic plunge takes bite out of investors

Trader Tommy Kalikas works on the floor of the New York Stock Exchange Monday. (Associated Press) (Richard Drew)

The Dow Jones industrial average tumbled more than 1,100 points Monday as stocks took their worst hit since 2011.

Two days of steep losses have erased the market’s gains from the start of the year and curbed a period of record-setting for stocks.

“People really got upset by the recent jobs report that hourly wages have ticked up, the Case-Shiller Index on home prices rose by 6.4 percent, and healthcare premiums are expected to rise sharply with the end of Obamacare penalties for the uninsured,” said Michael A. Tyler, chief investment officer at Eastern Bank Wealth Management in Boston. “It shows that inflation may not stay very low forever.”

Banks fared the worst as bond yields and interest rates nosedived. Healthcare, technology and industrial companies all took outsize losses and energy companies sank with oil prices.

At its lowest ebb, the Dow was down 1,597 points from Friday’s close. That came during a 15-minute stretch where the 30-stock index lost 700 points and then gained them back.

Market experts have predicted a pullback for some time, noting that declines of 10 percent or more are common during bull markets. There hasn’t been one in two years, and by many measures stocks had been looking expensive.

“Markets are really concerned about inflation and with that, bond yields started to move substantially,” Tyler said. “As inflation and interest rates rise, stocks start to look a little less attractive.”  

The Dow finished down 1,175.21 points, or 4.6 percent, at 24,345.75.

The Standard & Poor’s 500 index, the benchmark most professional investors and many index funds use, skidded 113.19 points, or 4.1 percent, to 2,648.94. That was its biggest loss since August 2011, when investors were fearful about European government debt and the U.S. came close to breaching its debt ceiling.

The slump began on Friday as investors worried that creeping signs of higher inflation and interest rates could derail the U.S. economy along with the market’s record-setting rally. Energy companies, banks, and industrial firms are taking some of the worst losses.

The S&P 500 has fallen 7.8 percent since Jan. 26, when it set its latest record high. Investors are worried about evidence of rising inflation in the U.S. Increased inflation might push the Federal Reserve to raise interest rates more quickly, which could slow down economic growth by making it make it more expensive for people and businesses to borrow money. And bond yields haven’t been this high in years. That’s making bonds more appealing to investors compared with stocks.

The stock market has been unusually calm for more than a year. The combination of economic growth in the U.S. and other major economies, low interest rates, and support from central banks meant stocks could keep rising steadily without a lot of bumps along the way. Experts have been warning that that wouldn’t last forever.

As bad as Monday’s drop was, the market saw worse days during the financial crisis. The Dow’s 777-point plunge in September 2008 was equivalent to 7 percent, far bigger than Monday’s decline.

Stocks hadn’t suffered a 5 percent drop since the two days after Britain voted to leave the European Union in June 2016. They recovered those losses within days.

The last 10 percent drop for markets came in early 2016, when oil prices were plunging as investors worried about a drop in global growth, which could have sharply reduced demand. U.S. crude hit a low of about $26 a barrel in February of that year. A drop of 10 percent from a peak is referred to on Wall Street as a “correction.”

Bond prices tumbled after moving sharply higher on Friday. The yield on the 10-year Treasury slipped to 2.73 percent from 2.84 percent. That hurt banks by sending interest rates lower, which means banks can’t charge as much money for mortgages and other types of loans.

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