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Friday markets tank again. Interest rates, Columbus Day worries to blame?

Written By | Oct 5, 2018

WASHINGTON. Wages up, unemployment down, and a long, Columbus Day holiday weekend to look forward to. So what’s not to love this Friday if you’re an investor in stocks and bonds? Plenty, apparently. We’re watching unhappy markets tank again Friday morning, as Thursday’s gloom and doom spreads throughout Wall Street.

The problem? Another uptick in interest rates Friday morning has taken center stage in the heads of traders and investors. We’ve seen this one before.

Interest rates increase, markets tank

As a result of Friday’s interest rate jump, the Thursday bears remain in control of Friday’s markets in what’s shaping up as Day 2 of a big market Super Smackdown.

As we write this piece, just after Friday’s noon hour, both the Dow and the S&P 500 are off nearly one percent, while the tech-heavy NASDAQ is getting absolutely slammed – off over 1.5 percent at the moment. Maybe that true-or-false news about those sneaky Chi-com mini-me spy chips in your cellphone is continuing to take a toll. Whatever the case, even a hint that this might be true – and pervasive – is creeping out those generally irrationally exuberant tech investors. When that happens, markets tank. (UPDATE: Approaching 2 p.m. ET, markets continue to worsen, with the Dow off 231 points and counting for a nearly 1 percent drop thus far.)

Columbus Day weekend blues?

Making matters still worse: In this gloomy environment, finicky traders don’t want to hang on to iffy positions over a long holiday weekend even though most markets are (sort of) open for business next Monday. On the other hand, we suspect at least some big investors don’t want to be too heavily invested during this weekend. With little things like the Kavanaugh Kabuki coming to a head in The Swamp, no one has any idea what kind of headline risk we might all be risking come Monday.

That rapid jump in interest rates plus the continuing nastiness and uncertainty in Washington just makes it uncomfortable to hold large, sometimes unstable positions through this long weekend.

U.S. economic news is generally positive

According to Fox Business, the U.S. economy seemed to be going swimmingly for the most part in the month just ended.

“The U.S. economy added 134,000 jobs in September below analysts’ expectations while the unemployment rate was 3.7 percent, the lowest since 1969.

“Analysts polled by Refinitiv (formerly Thomson Reuters) forecast that the U.S. economy would add 185,000 jobs in September with the unemployment rate ticking down to 3.8 percent. In August, the unemployment rate was 3.9 percent.

“Wages increased by 0.3 percent in September, taking the 12-month wage growth to 2.8 percent.

“‘Another solid jobs report; not too hot and not too cold,’ Kate Warne, investment strategist at Edward Jones told FOX Business.

“The number of Americans active in the workforce was steady, with the labor participation rate coming in at 62.7 percent.”

But wait! There’s more!

According to this Fox Business report, there’s even a plausible reason why the jobs numbers might have been a bit wobbly in September.

“Manufacturing, construction and health care sectors added jobs in September, while retail, leisure and hospitality lost jobs. With retail, leisure and hospitality susceptible to bad weather – it is possible Hurricane Florence is behind the lower-than-expected number.”

With a substantial chunk of the Carolinas still out of commission as a result of Florence – including key parts of North Carolina’s vital business, banking and tourist hubs – the super-soaker storm may indeed have been at least partially to blame.

But it’s the current and surprisingly intense jump in interest rates that has more than a few traders and investors spooked. After Thursday’s big jump, 10-year U.S. Treasury yields took a look at the jobs and unemployment numbers and vaulted ahead once again. With 10-year yields now hovering around 3.2 percent, interest rates are flirting with a 7-year high.

What’s the deal with interest rates and bonds?

As I used to teach in my old investment seminar, there’s a pretty reliable rule in play when it comes to bonds and yields.

When interest rates go up, bond prices go down.
When interest rates go down, bond prices go up.

Right now, we’re dealing with the first part of this rule. When interest rates jack up like this, the price of any bond or bond-like instrument you own goes right down to match current yields. These hits to your bond principal can vary, depending on the quality of the bond you hold, its maturity day (when you get your money back), and so forth. But every time rates jump like this, your principal gets hit.

Contrary-wise, if you’re a bond buyer looking for bargains, this can also mean you can pick up some perfectly good bonds for cheap. Or relatively so. But the trick is to estimate how quickly interest rates will continue to rise in an environment like this one. And when those increases will finally come to a halt. All this is making for an uncertain environment right now.

The other side of the coin

The flip side of the bond phenomenon, however, is what makes experienced investors really nervous. Within reason, bonds are viewed as more boring investments than stocks. But they’re also viewed, in the main, as safer investments.

As a result, as bond yields increase in a bearish interest rate environment, conservative investors – like that huge and growing army of increasingly conservative Boomer investors – their tendency is to get out of those riskier stocks and get into bonds. And the faster they do this, the faster those risky stocks will dive off the cliff. It’s a big reason why we’re watching U.S. markets tank today.

Expect some kind of snapback next week, with interest rates pulling back a bit, giving a positive jolt back to the stock market.

But, with the Fed still in an absurdly threatening mood, despite no sign of inflation above their target, we may be seeing only the start of a treacherous market. Will these interest rate hikes finally kill off the Great Trump Bull Market? To be honest, who the hell knows. But all of us need to be careful here.

Columbus Day Schedule

And oh, yes, as we indicated earlier, the Columbus Day holiday weekend has arrived. Monday, October 8, 2018 is a banking holiday. For investors, however, it’s a little weird.

And so, for your convenience, here’s our list of things investors need to regarding this Columbus Day weekend on Wall Street.

  • Friday, October 5, 2018 (today). Markets will be open during normal trading hours in advance of Columbus Day, Monday, October 8, 2018. Fixed Income orders placed after 5 p.m. EST on Friday, October 5, 2018 will be entered for the next business day, Tuesday, October 9, 2018.
  • Monday, October 8, 2018 is indeed a Federal and bank holiday, meaning that the Federal government, most state and local governments, and most banks will be closed in observance of Columbus Day.
  • Perhaps surprisingly for traders and investors however, Columbus Day is a normal business day for Wall Street even if many of us have the day off from work. But while next Monday is a regular trading day in most respects, it is not a settlement day. In other words, you might have to wait an extra day if you’re expecting to actually cash out of a position.
  • In addition, please note that some but not all mutual funds will not be trading on Monday.
  • One more thing. The Bond Market will be closed on Columbus Day. Bond trading re-opens Tuesday, October 9, along with other debt and equity vehicles.
Drive safely

That’s it for now. Have a good long weekend, assuming your employer is giving you time off. And we’ll see you back here sometimes next Tuesday, October 9. Let’s hope we’re not watching these markets tank yet again next week.

—Headline image: Wile E Coyote Tells us which way stocks are going today.
(Warner Bros. cartoon character, modification by the author for satirical purposes only.)

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17