What Really Spooked Markets?

Rising U.S. interest rates have finally started to worry stock investors.

- Peter Coy with Ben Steverman and Sarah Ponczek

It was quiet out there in the markets—spooky quiet. All five of the calmest quarters for U.S. stocks in the past 20 years have occurred since the start of 2017. Then came Oct. 10-11, when markets were hit by a storm that came out of the clear blue sky. The S&P 500 fell 5.2 percent over two days. That represented the fifth-biggest increase in volatility in the almost 90-year history of the index and its predecessors, according to Rocky Fishman, a Goldman Sachs Group Inc. equity derivatives strategist.

Stocks partially rebounded in the following sessions. Even so, there was a sense that something had changed. Several of the previous volatility spikes had clear causes, such as the outbreak of the Korean War in 1950, President Dwight Eisenhower’s heart attack in 1955, and the failure of a United Airlines buyout in 1989. This time around, Democrats quickly blamed the mini crash on President Trump’s trade policies, while other observers cited higher oil prices, the strong dollar, or rising labor costs. The president blamed the Federal Reserve, which he says will damage economic growth by raising interest rates too much. “I think the Fed is making a mistake,” he said on Oct. 10. “They’re so tight. I think the Fed has gone crazy.”

Trump isn’t entirely wrong. Many economists and market strategists agree with him that higher interest rates are a big factor in the stock market’s sudden weakness. Where they part company with the man in the White House is over Trump’s conviction that the Fed is making a mistake. Many say a gradual course of rising rates is just what the economy needs now—even if that makes stock investors nervous.