Dow plunges more than 1,000 points, falls into correction territory

The Dow Jones industrial average plunged 1,033 points Thursday, its second-worst drop in history, extending its losses in the recent selloff to more than 10% and putting it officially into correction territory.

The blue-chip stock average’s recent drubbing, which follows its record 1,175-point drop Monday, has been fueled by fears that a long period of low interest rates and tame inflation that have boosted the economy and fueled a rapid rise in stock prices may be nearing an end as economic conditions improve.

“The Dow has been hit by a tsunami of volatility,” says Paul Schatz, president of Woodbridge, Conn.-based investment management firm Heritage Capital. “The market is repricing in a lot of factors at once. And rates have run up fast. The market always has a tough time when things happen in a linear fashion.”

The Standard & Poor's 500 stock market, a broader market gauge that is a core holding in 401(k) plans, also fell into correction terrritory. It's 10.2% drop since its Jan. 26 record high is its biggest since a 14.2% decline ending in February 2016.

The double-digit percentage stock decline has occurred even though Wall Street stresses that the health of the economy, labor market and U.S. businesses remain strong. 

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On Thursday, the yield on the 10-year Treasury note again ticked up to a recent four-year high of 2.88%, sparking fears that rates could quickly top the key 3% level.

The stock market has also been upended by an unwinding of a popular trade that relied on market volatility to remain calm. But that trade has turned bad amid wild price swings that have turned suddenly violent since the market's peak.

Sparking the turbulence was a report released last week showing that hourly wage growth rose at its fastest pace since 2009. That strong pay data sparked fears of coming wage inflation, which intensified worries that the Federal Reserve could hike rates more often this year than the three times they have originally signaled.

“The market has undergone a psychological change,” says Doug Ramsey, chief investment officer at The Leuthold Group in Minneapolis. “The mystery now is what level on the 10-year Treasury will, if not break the bull market’s back, at least knock it back a few steps.”

While Wall Street has been calling for a correction for some time, given the market’s euphoric rise, the fall has been more violent and quicker than anticipated.