From Thomas Franck: Stocks erased early gains Friday, falling into negative territory as a week-long equity exodus put the major indexes on track for one of their worst weeks of the year.
The Dow Jones Industrial Average fell 35 points in turbulent trading that sent the blue-chip index up as much as 300 points earlier in the day, only to trade in negative territory less than one hour later. The initial tick upward came as Federal Reserve Bank of New York President John Williams said that the central bank could reassess its interest rate policy and balance sheet reduction in the new year if the economy slows.
Market participants interpreted Williams’s comments as a shift in tone from Fed Chair Jerome Powell’s speech earlier this week. Powell said on Wednesday that the Fed’s balance sheet reduction will continue as planned in 2019 amid more rate hikes.
Also supporting the Dow was athletic apparel company Nike, which rallied nearly 8 percent following strong earnings results. The broader S&P 500 fell less than 0.4 percent while the tech-heavy Nasdaq Composite shed 1.5 percent as technology shares rolled over.
Facebook lost 5.5 percent, Apple lost 1.9 percent and Amazon lost 4.2 percent.
“The message people should take home, especially if there’s a government shutdown, is that longer term, the prospects for equities are not good,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “There are lots of signs now suggesting that we may be looking at a recession. I would say that the risk here is that a whole lot of confluence is taking place: The trade was is not going to end soon, and the Fed totally misjudged the market in suggesting two more rate hikes next year.”
Stocks are on track for steep losses for the trading week and the month of December.
Here’s a review of the financial wreckage:
- The Dow and Nasdaq on Thursday posted their lowest closes since October 2017, while the S&P 500 finished at its lowest level since September 2017. The Nasdaq briefly entered a bear market before recovering.
- The Dow and S&P 500 have each lost about 5 percent this week; the Dow has shed more than 1,100 points since Monday.
- The Dow and S&P 500, which are both in corrections, are on track for their worst December performance since the Great Depression in 1931, down more than 10 percent each this month.
- The Dow is on track for its worst month since February 2009.
- The Russell 2000, which tracks the performance of stock of smaller companies, is on pace for worst month since October 2008.
- Both the Dow and the S&P 500 are now in the red for 2018 by at least 7 percent.
Stocks initially caught an early bid Friday morning after New York Fed President Williams said the central bank was listening to the market, and could re-evaluate its outlook for two rate hikes next year.
“We are listening, there are risks to that outlook that maybe the economy will slow further,” Williams told Steve Liesman on CNBC’s “Squawk on the Street” Friday.
“What we’re going to be doing going into next year is re-assessing our views on the economy, listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views, ” he said.
U.S. equities rallied sharply during the interview on Friday, but quickly staged an about-face thereafter.
The Fed’s decision to raise the benchmark overnight lending rate by one quarter point on Wednesday triggered a new wave of selling across Wall Street earlier in the week. That move was widely expected by markets but investors appeared to be taken off guard by Fed Chairman Jerome Powell’scomments that the central bank was satisfied with its current path to reduce the balance sheet with no plans to change it.
“This is a real magnificent speech and much different from what most of us are accustomed to,” said Anthony Chan, Chief Economist at J.P. Morgan Chase. “The concern of the market was: what is the Federal Reserve going to do with the fed funds rate in 2019? John Williams told us everything’s on the table, they can adjust that path.”
“Then of course the markets are really worried about that autopilot situation on the balance sheet,” Chan added. “Once again, John Williams said even that is on the table, that if things were to shift, that the Federal Reserve would be flexible on that.”
The Fed currently is allowing $50 billion a month to run off its massive debt balance sheet as its securities mature, tightening financial conditions. The balance sheet is mostly a collection of bonds the central bank purchased to vitalize the economy during and after the financial crisis.
Government shutdown concerns
Sentiment was dampened Friday after President Donald Trump aggravated fears of a government shutdown after tweeting:
“The Democrats, whose votes we need in the Senate, will probably vote against Border Security and the Wall even though they know it is DESPERATELY NEEDED. If the Dems vote no, there will be a shutdown that will last for a very long time. People don’t want Open Borders and Crime!”
Equities fell to their lows of the day in the previous session after U.S. House of Representatives Speaker Paul Ryan announced that President Trump would not sign a temporary government funding resolution without funding for a U.S.-Mexico border wall.
Later on Thursday, the House passed a temporary spending bill with more than $5 billion for Trump’s border wall — an inclusion which will likely impede its ability to clear the Senate. The Senate had unanimously approved a bill Wednesday night to keep the government running through Feb. 8 — without border wall money.
“Although shutdowns get a lot of media hype, the reality is that stocks tend to take them in stride. In fact, the S&P 500 has gained during each of the five previous shutdowns,” explained LPL Senior Market Strategist Ryan Detrick.
Both House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer have flatly said congressional Democrats will not approve wall money. As Republicans need Democratic votes to pass spending legislation in the Senate, a partial shutdown is all but assured if the GOP insists on funding for the barrier.
— CNBC’s Sam Meredith, Eustance Huang, Kate Rooney and Jacob Pramuk contributed to this report.