(Bloomberg) -- A regular feature of U.S. stock market downdrafts over the last few years has been stabilization during the weekend after traders got a chance to breathe. Not so this time.
U.S. stock index futures fell for a third day, extending losses after signs of encroaching inflation and surging bond yields sent major benchmarks to their worst week in two years. March e-mini contracts on the Nasdaq 100 Index fell 0.6 percent as of 6:25 p.m. in New York. The Nasdaq 100 Index contract slipped 0.5 percent and Dow Jones Industrial Average contracts slid 0.7 percent.
“The slight decline in futures tonight is a departure from the frequent overnight ramps in this long bull market,” Brian Frank, portfolio manager at Key Biscayne, Florida-based Frank Capital Partners LLC. “If this were just a stock story, it would be all part of normal historical volatility returning to an abnormally quiet market. However, fixed income, cryptos, and international markets are all moving together. The broadness of the move and the aggressiveness of investors positioning explains the general unease.”
With the exception of Boeing (NYSE:BA) Co., every stock in the Dow average lost at least 1 percent last week, while more than 450 companies in the S&P 500 fell. Concern that a faster expansion in U.S. hiring and wages will prompt the Federal Reserve into a tougher stance against inflation erased about two-thirds of January’s U.S. equity advance, the biggest since 1997.
Before last week, a steady rally powered partly by optimism over Donald Trump’s tax cuts pushed stock valuations to some of the highest levels since the internet bubble. Stocks have been in rally mode for the better part of nine years, propelled by stimulus enacted by the Fed to restore the economy after the financial crisis.
“When you have a bad Friday and an indication of a bad Monday, it can cause some additional selling panic, even though on a fundamental level the economic backdrop is still strong,’’ said Tim Ghriskey, managing director at Solaris Asset Management. “Selling can cause more selling, and that can cause more danger for the economy, if the stock market has a major correction simply because everyone wants to sell.”
Speaking on CBS’s “Sunday Morning” earlier, outgoing Fed Chair Janet Yellen said U.S. stocks and commercial real estate prices are elevated but stopped short of saying they’re in a bubble. The S&P 500 has gained 85 percent since she took office in February 2013.
“Well, I don’t want to say too high. But I do want to say high,” Yellen said on CBS’s “Sunday Morning” in an interview recorded Friday as she prepared to leave the central bank. “Price-earnings ratios are near the high end of their historical ranges.”
Signs of nervousness abounded on Friday, when the Cboe Volatility Index jumped 29 percent to cap a weekly increase that roughly matched its surged in August, when concern about tech stock valuations pushed the Nasdaq 100 down for four straight weeks. As traders rushed to hedge on Friday, options volume on the VIX exceeded the previous record by 39 percent, with 4.3 million contracts traded.
“We are not concerned about a sustained move lower in stocks near term,” Dennis Debusschere, head of portfolio strategy at Evercore ISI, wrote in a note to clients on the weekend. “Current earnings and forward revisions have been strong, but some PE contraction should be expected” as bond volatility increases, he said.
Last week’s retreat, the first of 2018, came amid a crush of signals that would ordinarily be bullish for investors, including record inflows into mutual and exchange-traded funds and frenetic account openings at discount brokerages. Chris Harvey, the head of equity strategy at Wells Fargo (NYSE:WFC) & Co., said clients were mostly calm during Friday’s 666-point plunge in the Dow Jones Industrial Average.
“We’re not really hearing and seeing the fear on the other side of the phone,” Harvey said in an interview Friday. “There’s a behavioral issue about this. If you sold over the last 12 and 24 months, you’ve come to regret that. So what we saw in the second half of 2017 was more or less a sellers’ strike where people didn’t want to re-position and didn’t want to sell because it was basically ripping up money.
