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Dow drops more than 600 points -- worst week in 2 years

Posted: Feb 02, 2018 2:50 PM Updated:

(CNN Money) -- Wall Street is having its worst day of the Trump presidency.

The Dow dropped 650 points, or 2.5%, on Friday despite a strong jobs report that showed wage growth is finally starting to pick up. That's great news for workers, but it reinforced investors' concern about inflation and the bond market.

The sell-off knocked the Dow well below 26,000. Both the Dow and S&P 500 are on track for their biggest weekly drops since early 2016 -- nearly 4% each.

"We've got a smorgasbord of negativity," said Ken Odeluga, market analyst with City Index in London. "It's been pretty nervous all week."

Of course, this week's slide does little to dent the overall gains the market has achieved since President Trump's victory. The Dow and the Nasdaq have climbed more than 40% apiece since the 2016 election. The S&P 500 has advanced for 10 consecutive months. That hasn't happened since 1959.

Even stock market bulls have long said that a pause -- or even a dip -- would help prevent the market from overheating.

"We've just gone too far, too fast," said Art Hogan, chief market strategist at B. Riley FBR. "We had this perfection of 2% higher every week -- and that really is just not reality."

Some market analysts said the political controversy over the release of the disputed GOP memo is rattling Wall Street.

"You've got trouble in the Department of Justice and the FBI at the senior level," said Jeffrey Saut, chief investment strategist at Raymond James.

"It all hit when the market was ready to go down anyway. It just accelerated it," Saut said.

"There looks like a breakdown of the institutions in our country," said Ian Winer, head of equities at Wedbush Securities. "No matter what side you're on, that's not good."

The Dow fell 540 points over the first two days of the week. It rebounded 261 points at the open Wednesday, then gave up much of those gains by the end of the day.

The turbulence stands in stark contrast to the unusual calm that had settled over Wall Street for months as stocks raced to all-time highs. The VIX, a measure of market volatility, has soared 35% this week.

Related: Alan Greenspan - 'We have a stock market bubble'

January's jobs report didn't settle the market down. The economy added 200,000 jobs in January, and wages grew at the fastest pace in eight years.

But if wages grow too fast, they could eat into Corporate America's record profit margins.

The other concern: Wage growth could be a sign that inflation, which has been mysteriously low for years, may heat up. That would force the Federal Reserve to raise interest rates faster than investors may be comfortable with.

Those worries are showing up in the bond market. The 10-year Treasury yield reached a four-year high of 2.84% on Friday. It was at about 2.4% at the start of the year.

Some investors are worried rates could climb high enough to slow the economy by raising borrowing costs. They also worry that higher returns on bonds will make stocks look less attractive by comparison.

"Those rising rates are making it harder to say there is no alternative to stocks," said David Kelly, chief global strategist at JPMorgan Funds.

Former Fed Chairman Alan Greenspan said this week that both stocks and bonds are in a "bubble."

Related: Are GE's days on the Dow numbered?

The latest results from major companies were met with skepticism from investors.

While Google parent Alphabet posted its first $100 billion sales year, it also reported a rare quarterly loss because of a $9.9 billion charge related to the new tax bill. Shares slumped 6%. Apple reported record sales but disappointing iPhone sales. Amazon shares soared 6% after posting its first $1 billion quarterly profit. But that was putting downward pressure on some traditional brick-and-mortar retailers whose shares have performed well so far this year.

ExxonMobil was the biggest loser on the Dow on Friday, sinking 5% after its results widely missed expectations. That was despite a $5.9 billion windfall thanks to the tax law.

"You've had a stock market that's gone absolutely crazy based on tax reform juicing earnings," said Wedbush's Winer. "And numbers are coming in that are OK, but not blowing the doors off."

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