Stocks Sink, Wall Street’s ‘Fear Gauge’ Spikes as Iran War Continues
Wall Street sold off as oil prices jumped and the war in Iran continued unabated on March 27.
The two major US indexes are now in a correction zone, defined as a decline of more than 10% from recent highs. The Dow Jones Industrial A average fell nearly 800 points to close 1.7% lower on the day, and 10% off its recent high. The Nasdaq Composite Index closed 2.15% lower, down more than 11% from a high set last October. The S&P 500 closed up 1.6%.
The 10-year US Treasury note, on the other hand, rose 2 basis points to about 4.44%. That was up from 4.48% earlier, but still signals that fixed income assets have a tough road ahead in a deflationary environment.
Investors are selling bonds, which provide steady income streams as the war in Iran raises prices for everything from energy to food. Bond prices move in the same direction as yields. That was on display on March 26, when the US government had to pay higher yields on seven-year notes to attract cautious buyers.
High bond yields are rising in all types of credit markets, making everything from mortgages to small business loans more expensive. The prospect of economic recovery and high inflation, affected by the oil shock, has many analysts comparing the current period to the 1970s.
Economists ‘Worried’
“There are ways for the economy to manage short-term disruptions (eg, drawing on consumer savings and inventories),” said Don Rissmiller, chief economist at Strategas, in a March 27 note.
Now, Rissmiller said, the war has dragged on for so long that he is “worried.”
The Trump administration has become known for what some analysts call the “TACO” policy, which is short for “Trump Always Chickens Out.” The White House has repeatedly proposed policy, then reversed it when markets reacted negatively: last April, when it proposed sweeping new rates, for example.
Markets have not reached the ‘Panic Threshold’ Yet
One group of analysts thinks that the chaos was not strong enough this time. On March 27, Nicholas Colas, founder of DataTrek Research, wrote that markets have not yet reached the threshold where policymakers decide to intervene to support prices.
“In the US, oil prices and the CBOE Volatility (VIX) Index are time-proven triggers for policy changes,” Colas wrote. “US stocks remain under pressure because they are nowhere near the pre-tipping levels.”
Previously, oil prices were expected to double before the policy change, he said, and the VIX, also known as Wall Street’s “fear gauge”, closed above 35 or 43.
On Friday, the price of a barrel of Brent was about 62% above its pre-war high. The VIX was just over 31, up more than 14% during the day.
This article first appeared in USA TODAY: Stocks sink, Wall Street ‘gear gauge’ rises as Iran war rages on.
Reporting by Andrea Riquier, USA TODAY / USA TODAY
USA TODAY Network via Reuters Connect
