The stock market freakout of early 2018 isn’t done yet.
Dow futures slumped more than 400 points, or 1.7%, early Tuesday morning, suggesting the turmoil of the past few days is set to deepen. Earlier in the night, they were down more than 800 points.
The Dow has already plummeted more than 1,800 points over the previous two trading sessions. Monday was particularly brutal: the index tumbled a record 1,175 points. The 4.6% plunge was the Dow’s worst day since August 2011 and knocked it into the red for the year.
The tremors also spread to the other side of the globe, with stocks in Asia plummeting overnight. Japan’s Nikkei lost more nearly 5%, while stocks in Hong Kong dropped almost 4%.
After months of unusual calm, fear has raced back onto Wall Street in dramatic fashion. The VIX index of market volatility spiked by a record 116% to the highest level in more than two years on Monday. CNNMoney’s Fear & Greed gauge of market sentiment has gone from “extreme greed” a week ago to “extreme fear.”
The sudden mood shift in the once-euphoric market is all about the threat of inflation. Worries about inflation first emerged in the bond market. Heavy selling sent the 10-year Treasury yield spiking to a four-year high.
Investors have become concerned that the era of extremely low interest rates that propped up stock prices for years may soon be over. The fear is that the U.S. economy could overheat, forcing the Federal Reserve to aggressively raise interest rates. That could take a lot of air out of the stock market.
The selling on Wall Street has left the stock market on the verge of a “correction,” which signifies a 10% retreat from a previous high. The Dow is down 8.5% from its previous closing high, while the S&P 500 is off by 7.8%. The Nasdaq has tumbled 7.2% from its all-time high.
Despite the heavy selling, the Dow is still up around 6,000 points since President Trump’s election. But that’s down significantly from the 8,000-point gain it was showing a few weeks ago.
It’s becoming clear stocks ran up too far, too fast in the euphoria over Trump’s tax cuts and the improving economy. The U.S. unemployment rate is sitting at 17-year lows and global growth has gained momentum.
Market analysts have long been saying the market was overdue for a cooling-down period. The question now is how far stocks will retreat before investors feel emboldened to start buying again.