Nation & World

Dow drops sharply as two industrial giants warn of trouble

A Wall Street sign in New York on May 25, 2018. CREDIT: Bloomberg photo by Michael Nagle.
A Wall Street sign in New York on May 25, 2018. CREDIT: Bloomberg photo by Michael Nagle.

U.S. markets opened in a steep slide on one of the busiest earnings days of the year as a global sell-off and a disappointing report by 3M — a major industrial company that is a window into the U.S. economy — had nervous investors fleeing stocks.

The Dow Jones industrial average dropped more than 350 points, or 1.4 percent, in morning trading Tuesday. The Standard & Poor’s 500-stock index was down 1.5 percent, its fourth decline in as many days. The tech-heavy Nasdaq, which has been whacked in recent weeks from the sell-off in the so-called FAANG shares — Facebook, Amazon.com, Apple, Netflix and Alphabet’s Google, Alphabet — was off 1.7 percent.

All three slipped to three-month lows.

“Politics and earnings,” said Sam Stovall, chief investment strategist of U.S. Equity Strategy at CFRA. “Both 3M and Caterpillar appear to be spinning their wheels and showing the true effects of global tensions.”

3M and Caterpillar, another benchmark, dropped more than 6 percent in Tuesday’s premarket trading as the companies failed to project robust outlooks for the rest of 2018. Caterpillar warned dealers worldwide that it would raise prices because of the growing cost of steel. The companies are closely followed because they have huge international sales and are seen as economic crystal balls.

Ed Yardeni, president of Yardeni Research, said on CNBC on Tuesday morning that he has counted 62 “panic attacks” in the current bull market, including October’s sell-off.

“The question is, is this a panic attack or something more,” he said. “I think this too shall pass. This will just turn out to be another [buying] opportunity.”

Another factor weight on the markets is the Federal Reserve’s commitment to gradually raising interest rates, which has drawn criticism from President Donald Trump. Presidents historically prefer low interest rates because they help boost the economy and, in turn, help whoever is in the Oval Office.

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Rate increases have raised the U.S. 10-year Treasury bond to around 3.2 percent, its highest rate in years. The 10-year is closely followed because it is another indicator of the economy and the future of the stock market. Higher interest rates on the 10-year could steer away investors, who could sell equities in return for the less-risky Treasury note.

“Here is what is driving the markets the last 10 days,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute. “Is the Fed going to make a mistake? Is global growth going to slow down? What are earnings going to be in 2019? We don’t think global growth is going to slow. We don’t think the Fed is going to make a mistake. And we don’t think there is going to be an all-out trade war.”

U.S. markets were roiled in early morning hours from the steep decline across the board in Asia, reversing a slight Monday rally overseas. The Japanese Nikkei 225, China’s wheezing Shanghai Composite and Hong Kong’s Hang Seng all fell more than 2 percent.

Europe was down, too, with the London FTSE 100 down nearly 1 percent, the German DAX down 1.8 percent and the Frech CAC 40 dropping slight more than 1 percent.

Markets are being hit from many sides: fears that the Chinese economy is slowing; uncertainty over an upcoming U.S. election; rising interest rates in the United States; and worries that the long U.S. bull market is on its last legs.

Rising tensions between the United States and Saudi Arabia, a major world oil supplier, over the death of a Washington Post columnist Jamal Khashoggi has also put markets on edge. Saudi’s ability to temper oil prices makes it a huge player in the global economy.

Oil prices slid Tuesday after Saudi Arabia said it would increase production, which would keep world supply and demand for oil in balance. Oil prices are based on a careful choreography between producers and consumers, with politics, economic growth, weather, accidents, terrorism and a million other factors affecting oil prices.

Closely followed Brent crude dropped nearly 3 percent to below $80 per barrel, a key threshold that signals a plentiful supply, at least for the near term. West Texas Intermeidate futures were also trading lower at around $68 per barrel.

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A Saudi surge would make up for any Iranian shortfall that accompanies the economic sanctions that are going into effect next month against that country. President Donald Trump withdrew from the nuclear agreement with Iran earlier this year, removing Iran supply from most oil markets.

“You look at everything going on — Saudi Arabia, the oil market, Brexit, Italy, the U.S. elections, the Fed raising rates — I could go on and on,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “The question isn’t why is the market reacting. The question is why isn’t it worse.”

McMillan said he sees the market dropping even more as part of a reality check on the economy and global tensions. The earnings season so far has been healthy, although some companies have reported a slowdown in revenue growth.

But markets have seen several pullbacks, including an 11 percent decline in late 2015 and early 2016. Then the market dropped nearly 10 percent earlier this year.

“This is normal volatility. I would not be surprised if there’s more of a pullback,” McMillan said. “But as long as economic fundamental remain solid, the market usually comes back.”

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