U.S. stock markets opened up before turning down on Friday, capping a head-spinning week that wiped out as much as $3 trillion in stock market value as investors fled from equity funds.
The Dow Jones industrial average saw a 500-point swing in the first 90 minutes of trading. It opened up more than 200 points, or 1 percent and the broader Standard & Poor’s 500-stock index opened 1.1 percent higher, before the indexes gave up their gains and fluctuating back and forth between positive and negative territory in late morning.
Investors remained torn. The massive Trump tax cut should provide a huge stimulus to an economy already rushing ahead at full employment, boosting profits and growth. At the same time, fears are growing that interest rates will jump as the federal government borrows massive amounts to cover its growing deficits.
“There’s a lot boiling over in this pot,” Edward Yardeni, president of Yardeni Research, said. “The stock market clearly has concerns with what’s happening in the bond market and the bond market is becoming increasingly concerned with both monetary and fiscal policies.”
On Friday, measurements of volatility remained high, suggesting that the market could still lurch suddenly. And the interest rate on the U.S. Treasury bonds continued to inch higher, potentially luring investors away from stocks.
In a speech Thursday night, Esther L. George, president of the Federal Reserve Bank of Kansas City, said that “current conditions and the near-term outlook appear quite rosy.” But while “the nation remains far from a fiscal crisis,” she warned, “changes will be necessary to put government debt on a sustainable trajectory.”
Investors are worried about both fiscal and monetary policy. The Treasury Department last week quietly announced that the federal government is on track to borrow nearly $1 trillion this fiscal year — Trump’s first full year in charge of the budget. That’s almost double what the government borrowed in fiscal 2017.
At the same time, the Federal Reserve has said it expects to raise rates in three quarter poin increments, a modest start to returning to historically normal rates after the long recovery from the Great Recession of 2009. Moreover, the Federal Reserve has indicated that it will slowly reduce the amount of Treasury bonds it holds, potentially raising interest rates further.
The concerns reverberated around the world. Global markets, especially in Asia, fell sharply on Friday after U.S. stocks went into correction territory, dropping 1,000 points for the second time in a week.
Markets went down hard across the Asia-Pacific region were down. Shanghai closed down 4.05 percent, Hong Kong’s Hang Seng down 3.1 percent and Japan’s Nikkei lost 2.3 percent.
In Europe, however, the reaction was more measured, with the main stock indexes opening down sharply before climbing back up. By late afternoon, the indexes were off less than 1 percent.
The mercurial week had some analysts rethinking their positions. On Tuesday, Chris Rupkey, managing director and chief financial economist of MUFG Union Bank, issued a note to investors saying “The stock market is better than you think. Bet on it.” And “don’t be fooled by the modest decline in openings today.”
On Thursday, a more gloomy Rupkey told investors “the era of low interest rates is at an end which means the proverbial punch in the punch bowl is leaving the party. And fast! The stock market is a leading economic indicator and right now it points the way for the economy straight down.”
He added, “the fundamentals of the economy may look strong now, but it won’t be that way for long, if stocks do not rally back from these sobering losses.”
Big retail investment houses continued to urge calm. Fidelity noted that since 1920, the S&P 500 has suffered an average of three 5 percent corrections a year, a 10 percent correction once a year, and a 20 percent correction every three years.
But there were also concerns of an economic shift more profound than a correction of valuations.
Moody’s ratings service issued a note Friday predicting that “the federal government’s balance sheet is set to deteriorate materially.” It said that “rising mandatory spending on federal retirement programs, elderly health-care programs, and interest will cause deficits to widen, pushing the debt load higher.”
Moody’s said that “over the long run, the direct fiscal impact of the tax reform will also be amplified by a larger interest bill, both due to faster accumulation of debt and an accelerated increase in market interest rates.”
Treasury figures indicate that about half the national debt will mature in the next 70 months. That debt will need to be refinanced as interest rates are rising. The interest rate on outstanding Treasury borrowing averages less than 2 percent.
Moody’s also took issue with President Trump’s assertion that faster economic growth would offset tax revenues lost by cutting corporate and individual rates.
“According to our estimates, these effects will not be offset by faster economic growth, implying that both the debt burden and debt affordability will erode more quickly” than the Congressional Budget Office estimates, the ratings agency said.
Nonetheless, Moody’s affirmed its rating for the United States government, noting that “exceptional economic strength” would compensate for fiscal weaknesses.
It was a rough ride for Europe Friday, with jitters seizing the market in reaction to Wall Street’s roller coaster and the indexes were all down by around 5 percent compared to the beginning of the week.
The sell-off mirrored U.S. losses yesterday. The Dow Jones industrial average plunged more than 1,000 points Thursday. The Dow and the broader Standard & Poor’s 500-stock index are down more than 10 percent from their all-time highs, taking the markets into “correction” territory for the first time in two years.
Though some sort of correction was widely predicted, a week of precipitous drops and late-day surges has investors around the world worried about volatility to come.
Ups and downs in the United States have driven ups and downs in Asia. “It is clear that markets are still being driven by movements in the U.S.,” said Richard Jerram, chief economist at the Bank of Singapore.
“Relative calm in the S&P 500 on Wednesday led to fairly stable markets in Asia on Thursday, but another big U.S. drop in Thursday trading has produced another day of weakness across Asia on Friday,” he added.
The broad concern is that inflation is rising, which would pressure central banks to raise rates, making borrowing more expensive.
“The head winds blowing against markets is monetary tightening,” said Andy Xie, an independent economist in Shanghai. “Access to credit is going to be zero this year. This is the reason the market is going to struggle.
“This kind of yo-yo situation is going to last until the U.S. interest rate rises to a normal level,” he added.
Friday’s sell-off was led by the Shanghai Composite. Yang Delong, chief economist at First Seafront Fund, in the southern Chinese city of Shenzhen, said the plunge was simply a panic triggered by external factors.
He expressed confidence about the long-term outlook. “China’s economy has strong growth and the supply-side structural reform has achieved remarkable results,” he wrote.
Yang Liu and Luna Lin in Beijing and Paul Schemm contributed to this report.