Stocks slide again. Dow on track for its biggest monthly drop in a decade
It was another miserable day on Wall Street: A series of December slides continued, putting stocks on track for their worst month in a decade.
The Dow Jones industrial average dropped 464 points Thursday, bringing its losses to more than 1,700 points since Friday.
The benchmark Standard & Poor’s 500 index has slumped 10.6% this month and is almost 16% below the peak it reached in late September.
The mood has dramatically changed since the steady gains of this spring and summer. This fall, investors started to worry that global economic growth is cooling and that the United States could slip into a recession in the next few years. The S&P 500 is on track for its first annual loss in a decade.
The technology stocks that have led the market in recent years are now dragging it down. The tech-heavy Nasdaq composite is down 19.5% from the record high it reached in August.
The market swoon is coming even as the U.S. economy is on track to expand this year at the fastest pace in 13 years. Markets tend to move, however, on what investors anticipate will happen well into the future, so it’s not uncommon for stocks to sink even when the economy is humming along.
Right now, markets are concerned about the potential for a slowing economy and two threats that could make the situation worse: the U.S.-China trade war, which has lasted most of this year, and rising interest rates, which act as a brake on economic growth by making it more expensive for businesses and individuals to borrow money.
The selling in the last two days came after the Federal Reserve raised interest rates for the fourth time this year and signaled it was likely to keep raising rates next year, although at a slower rate than it previously forecast.
Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said investors felt Fed Chairman Jerome H. Powell came off as unconcerned about the state of the U.S. economy, despite deepening worries on Wall Street that growth could slow even more in 2019 and 2020. Wren said investors want to know that the Fed is keeping a close eye on the situation.
“He may be a little overconfident,” Wren said of Powell. “The Fed needs to be paying attention to what’s going on.”
Powell also acknowledged that the Fed’s decisions are getting trickier because they need to be based on the most up-to-date figures on jobs, inflation and economic growth. For the last three years, the Fed told investors weeks in advance that it was almost certain to increase rates. But things are less certain now, and the market hates uncertainty.
Treasury Secretary Steven T. Mnuchin said the market’s reaction to the Fed was “completely overblown.”
Investors have responded to a weakening outlook for the U.S. economy by selling stocks and buying ultra-safe U.S. government bonds. The bond-buying has the effect of sending long-term bond yields lower, which reduces interest rates on mortgages and other kinds of long-term loans. That’s generally good for the economy.
At the same time, the reduced bond yields can send a negative signal on the economy. Sharp drops in long-term bond yields are often seen as precursors to recessions.
The S&P 500 index fell 39.54 points, or 1.6%, to close Thursday at 2,467.42. The Dow sank 464.06 points, or 2%, to 22,859.60.
The Nasdaq fell 108.42 points, or 1.6%, to 6,528.41. The Russell 2000 index of smaller companies slid 23.23 points, or 1.7%, to 1,326.
Smaller-company stocks have been crushed during the recent market slump because slower growth in the U.S. economy will have an outsize effect on their profits. Relative to their size, they also tend to carry more debt than larger companies, which could be a problem in a slower economy with higher interest rates.
The Russell 2000 is down almost 24% from the peak it reached in late August and down 13.6% for the year to date. The S&P 500, which tracks larger companies, is down 7.7%.
The possibility of a partial shutdown of the federal government also loomed over the market Thursday, as funding for the government runs out at midnight Friday. In general, shutdowns don’t affect the U.S. economy or the market much unless they last several weeks, which would delay federal employees’ paychecks.
Oil prices continued to fall. Benchmark U.S. crude slid 4.8% to $45.88 a barrel in New York. It has sunk 40% since early October. Brent crude, used to price international oils, slid 5% to $54.35 a barrel in London.
After early gains, bond prices headed down. The yield on the two-year Treasury rose to 2.67% from 2.65%, while the 10-year note rose to 2.80% from 2.77%.
The gap between those two yields has shrunk this year. When the 10-year yield falls below the two-year yield, investors call it an “inverted yield curve.” That hasn’t happened yet, but investors fear it will. Inversions are often taken as a sign a recession is coming, although it’s not a perfect signal and when recessions do follow inversions in the yield curve, it can take a year or more.
“The bond market has been telling us something for about a year, and that is there’s not going to be much inflation and there’s not going to be a sustained surge in economic growth,” said Wells Fargo’s Wren.
As investors adjusted to the prospect of a weaker economy and lower long-term interest rates, the dollar fell to 111.11 yen from 112.36 yen. The euro rose to $1.1469 from $1.1368. The British pound rose to $1.2671 from $1.2621.
That pushed up the price of gold, which rose 0.9% to $1,267.9 an ounce. Silver rose 0.3% to $14.87 an ounce. Copper, which is considered an indicator of economic growth, fell 0.7% to $2.70 a pound.
Wholesale gasoline sank 4.6% to $1.32 a gallon. Heating oil fell 3.1% to $1.75 a gallon. Natural gas slid 3.8% to $3.58 per 1,000 cubic feet.