Rising interest rates suddenly are giving global stock markets a fear of heights.
Shares slumped worldwide yesterday as long-term bond yields surged and several central banks boosted their bellwether short-term rates.
U.S. market indexes suffered their biggest declines in three months, with the Dow Jones industrial average sliding 198.94 points, or 1.48 percent to 13,266.73, its third straight loss.
But the same force driving interest rates up - a strong world economy - also has underpinned the powerful rally in stocks this year, analysts note.
That's why many market pros say they aren't expecting more than a modest pullback in prices. "I see people selling stocks because there was a little blood bath in the [bond] market and that really looks like a mistake," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach, Calif. "Investors ought to have their shopping lists out."
Key U.S. market indexes hit record highs on Monday and are down 3.5 percent or less from those peaks. That has trimmed their year-to-date gains to mid-single-digits. The Dow is up 6.4 percent this year.
Yesterday, the Dow and broader stock indicators all showed declines. The Standard & Poor's 500 index dropped 26.66 to 1,490.72, and the Nasdaq composite index fell 45.80 to 2,541.38. The Russell 2000 index of smaller companies declined 15.89 to 825.32.
The Sun-Bloomberg index of the top stocks in Maryland fell 0.43 to 350.05. Constellation Energy Group Inc. declined $4.41 to $82.91. Black & Decker Corp. fell $2.69 to $91.01.
Declining issues outnumbered advancers by about 10-to-1 on the New York Stock Exchange, where consolidated volume came to a heavy 1.91 billion shares.
Still, the appetite for stocks in the near term may depend on the bond market and the direction it sets for interest rates.
The long-suffering housing market could be weakened further if rates continue to rise. Tighter credit could also damp the consumer spending that drives the economy.
The annualized rate, or yield, on the 10-year Treasury note - a benchmark for mortgages and other long-term rates - soared to 5.13 yesterday, up from 4.97 percent on Wednesday and the highest since mid-July.
Bond yields rise as the securities' prices fall. A rush of selling yesterday sent bond prices plummeting, deepening a decline that began in March.
"It is ugly. It's a major move in the market," said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. "The last of the bond bulls are throwing in the towel."
Many investors have been fleeing bonds in recent months on fears that surprisingly robust global economic growth could boost inflation pressures, which could drive interest rates even higher.
On Tuesday, Federal Reserve Chairman Ben S. Bernanke reiterated that the central bank remained concerned about inflation. Those remarks appeared to close the door on lingering hopes that the Fed might cut short-term rates soon to help the downtrodden housing market.
On Wednesday, the European Central Bank raised its key rate from 3.75 percent to 4 percent, citing economic strength and the need to restrain inflation.
And yesterday, the central banks of New Zealand and South Africa also tightened credit, which for some bond investors cemented the idea that global interest rates are likely to continue rising.
For bond investors who've been expecting rates to hold steady or decline, the news this week has been "a strong dose of smelling salts," said Michael Darda, chief economist at MKM Partners in Greenwich, Conn. "There's going to be [economic] growth. There's going to be some inflation. And there are not going to be any rate cuts."
Bond yields also have soared in Europe and Japan in recent days. The yield on the 10-year German government bond jumped to a four-year high of 4.54 percent yesterday from 4.46 percent Wednesday.
Economic data from Europe, Japan and many developing countries this year have been upbeat, and have offset fears that the U.S. growth slowdown in the first quarter would drag down the world economy.
"It's the global economy that's moving us now, rather than the other way around," said Joe Carson, an economist at money management firm AllianceBernstein in New York.
In overseas trading yesterday, China's benchmark Shanghai composite index rose 3 percent, while Japan's Nikkei stock average rose 0.07 percent. Britain's FTSE 100 closed down 0.27 percent; Germany's DAX index fell 1.44 percent; and France's CAC-40 fell 1.46 percent.
Many Wall Street pros say U.S. interest rates aren't likely to rise dramatically from current levels. Even though the domestic economy has perked up this spring, it isn't zooming, they say.
"I would argue that the lion's share or maybe even the vast majority of the move up in rates is behind us," said Bob Doll, chief investment officer at BlackRock Inc. in New York.
If rates stabilize soon, the stock market should bounce back from this sell-off, Doll said. "We still see stocks ending the year higher than they are today," he said.
Walter Hamilton and Tom Petruno write for the Los Angeles Times.
Stock of interest
J.C. Penney Co.
Shares retreated $3.40 to $77.79 after the third-largest U.S. department-store company said same-store sales fell 2 percent in May, compared to the same month a year earlier.