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Dow roars back for 567-point gain after scary start

Another dramatic day on Wall Street: Stocks nosedived, then they soared.The Dow plunged 567 points at the open...

Posted: Feb 7, 2018 11:38 AM
Updated: Feb 7, 2018 11:38 AM

Another dramatic day on Wall Street: Stocks nosedived, then they soared.

The Dow plunged 567 points at the open on Tuesday and briefly sank into correction territory -- a drop of 10% from its record high. But those losses quickly vanished, and the index ended the day with a mirror-image gain of 567.

It was the Dow's biggest point increase since August 2015 and the fourth-largest in history. The percentage gain of 2.3% is the biggest since January 2016.

The huge swing shows how volatile trading has become in what was once a calm and booming stock market.

"We had an extreme sell-off followed by an extreme bounce," said Peter Kenny, an independent market strategist and founder of Kenny's Commentary. "It was a massive reversal: Nearly 1,000 points on the Dow is mind-bending."

After starting the day sharply lower, the S&P 500 closed with a 1.7% gain, its best since November 2016. Bespoke Investment Group said it was the biggest open-to-close rally since 2011.

The powerful comeback may reflect a realization by investors that the economy is still strong, even if stocks flew too close to the sun earlier this year.

"Sometimes the market does get disconnected from economic reality to the upside and it needs to get in line," said Jack Ablin, chief investment officer at Harris Bank.

However, he said, "the fundamentals of the economy and credit markets remain sound."

Related: Are Trump's tax cuts backfiring on Wall Street?

The stock market freakout of 2018 hit a crescendo on Monday when the Dow plunged a record 1,175 points. The 4.6% plunge was the index's worst day since August 2011 and knocked it into the red for the year.

With Tuesday's bounce, the Dow recovered about half the losses from the day before. It's about 6% off its all-time high.

David Kotok, co-founder of Cumberland Advisors, called it a "wild rollercoaster ride." He said that when Dow futures plunged 1,000 points overnight, it amounted to "climactic panic selling" that could signal a bottom for the market.

On Capitol Hill, Treasury Secretary Steven Mnuchin reminded lawmakers that the stock market is up 30% since President Trump's election. He said the administration is focused on recently enacted policies like tax cuts as a driver of economic growth in the long run.

"The stock market has been functioning very well, and we continue to believe in the long-term impact of the stock market," Mnuchin said before the House Financial Services Committee.

Related: Market fear is back in a big way

The tremors on Wall Street spread around the globe. Stocks in Europe and Asia posted heavy losses.

Major markets in Europe shed roughly 2%, and stocks in Germany, Sweden and Spain fell into a correction. Japan's Nikkei nosedived 4.7%, while Hong Kong's Hang Seng suffered a loss of 5.1%.

After months of unusual calm, fear has raced back onto Wall Street.

The VIX index of market volatility spiked by a record 116% on Monday, to the highest level in more than two years. It ripped higher again Tuesday, then calmed down. At the end of the day, the VIX was down about 20%.

David Lebovitz, global market strategist at JPMorgan Asset Management, said that while volatility may remain "elevated" for days, "we are closer to the end than we are to the beginning."

One factor helping the stock market: The bond market has calmed down. The 10-year Treasury yield spiked to a four-year high of 2.85% in recent days because of worries about inflation. But it receded significantly on Tuesday, to 2.79%.

That's a relief because investors have become concerned that the era of extremely low interest rates that propped up stock prices for years may soon be over. The fear is that the U.S. economy could overheat, forcing the Federal Reserve to aggressively raise interest rates. That could take a lot of air out of the stock market.

Despite the heavy selling, the Dow is still up more than 6,500 points since President Trump's election. But that's down significantly from the 8,000-point gain it was showing a few weeks ago.

It's becoming clear stocks ran up too far, too fast in the euphoria over Trump's tax cuts and the improving economy. The U.S. unemployment rate is sitting at 17-year lows and global growth has gained momentum.

"The tax cut euphoria drove stocks up at an unsustainable pace," Scott Minerd, global chief investment officer at Guggenheim Partners, wrote in a research note.

Market analysts have long been saying the market was overdue for a cooling-down period. Now that the sell-off has happened, at least some investors feel emboldened to start buying again.

"The fundamentals are great. Earnings have been on fire," said Ed Yardeni, president of the investment advisory firm Yardeni Research. "I'm still bullish."

-- CNNMoney's Donna Borak and Rishi Iyengar contributed to this article.

Minnesota Coronavirus Cases

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Cases: 604608

Reported Deaths: 7642
CountyCasesDeaths
Hennepin1249941780
Ramsey52516897
Dakota46848471
Anoka42782458
Washington27433291
Stearns22559225
St. Louis18142313
Scott17552137
Wright16382149
Olmsted13401102
Sherburne1202495
Carver1067548
Clay826492
Rice8203110
Blue Earth762644
Crow Wing681795
Kandiyohi668185
Chisago620052
Otter Tail586284
Benton582998
Goodhue483974
Douglas475681
Mower470533
Winona461351
Itasca459963
Isanti440164
McLeod430861
Morrison424862
Beltrami407862
Nobles407550
Steele397816
Polk389072
Becker386755
Lyon363853
Carlton353056
Freeborn347133
Pine334923
Nicollet331345
Mille Lacs311854
Brown307940
Le Sueur297326
Cass286232
Todd285633
Meeker263443
Waseca238023
Martin235333
Roseau211221
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Hubbard196641
Dodge18793
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Swift106918
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Stevens92411
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Marshall88817
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Wilkin83213
Lac qui Parle75622
Big Stone6044
Grant5948
Lincoln5853
Mahnomen5669
Norman5479
Kittson49022
Unassigned48293
Red Lake4017
Traverse3775
Lake of the Woods3453
Cook1720

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Cases: 371146

Reported Deaths: 6053
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Polk58273640
Linn21228339
Scott20310248
Black Hawk16167312
Woodbury15241230
Johnson1462385
Dubuque13512211
Dallas1128999
Pottawattamie11229174
Story1071648
Warren584091
Clinton561593
Cerro Gordo554095
Sioux517674
Webster516094
Muscatine4884106
Marshall486876
Des Moines467572
Wapello4338122
Buena Vista426940
Jasper421172
Plymouth403181
Lee382356
Marion366076
Jones301057
Henry294537
Bremer288661
Carroll287152
Boone268634
Crawford268140
Benton259955
Washington257351
Dickinson249344
Mahaska232751
Jackson225242
Clay216727
Kossuth216166
Tama212071
Delaware211143
Winneshiek198835
Page194522
Buchanan194133
Cedar192323
Hardin187544
Fayette186743
Wright186040
Hamilton181951
Harrison180073
Clayton171157
Butler166335
Madison164619
Mills163724
Floyd163442
Cherokee159338
Lyon158841
Poweshiek157136
Allamakee152852
Hancock150334
Iowa149824
Winnebago144531
Cass139255
Calhoun138913
Grundy137333
Emmet135841
Jefferson133535
Shelby131737
Sac130920
Union130035
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Mitchell126643
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Guthrie123332
Humboldt119626
Palo Alto113623
Howard105022
Montgomery103638
Clarke100924
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Monroe96431
Unassigned9530
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Davis85225
Monona83131
Osceola78916
Greene78011
Lucas77923
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Taylor66812
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