US stocks took a further steep plunge on Monday, with the Dow Jones industrial average dropping 1,175 points, the largest one-day points fall on record and erasing all the gains made so far this year.
The drop came after another bad day on global markets as investors reacted to global equity losses overnight and concern that central banks will increase interest rates in response to inflationary pressures from surging global economies.
The Dow dropped 1,600 points in one instance before bouncing back. The index is now off more than 1,800 points over two days of trading. Global stock markets have shown little volatility over the last few years amid a period of unprecedented low interest rates that followed in the wake of the great recession.
But on the day that new Federal Reserve chair, Jerome Powell, took office, replacing Janet Yellen, that quiet period seemed to be over.
“This was volatility unleashed,” said Jack Ablin, chief investment officer at at Cresset Wealth. “It’s partially fear of interest rates, partially this new Fed chairman Jerome Powell, partially the market is overvalued relative to fundamentals.”
While market fear may not be based in any change in economic fundamentals, in its last meeting under chair Yellen, the Federal Reserve indicated it expects inflation pressures to increase through the year.
According to projections released in December, officials expect three rate hikes in 2018 – so long as market conditions remain broadly as they are – but some economists believe the central bank could add another increase at its final meeting of the year.
If the market falls continue they could prove problematic for Donald Trump who has consistently touted record high stock markets as proof that his presidency is boosting the economy.
US stocks have now lost $1tn in value in the first five days of February. However, the White House, responding to the market drop insisted on Monday night that long-term economic fundamentals “remain exceptionally strong”.