Battered and bruised for three months, a bull market whose durability has exceeded all others lurched within a few points of its demise on Christmas Eve, extending one of the roughest stretches for stocks since the financial crisis.
The benchmark Standard & Poor’s 500 index slid to the brink of its first 20% decline since 2009, a period that spans two presidential administrations and three Federal Reserve chairs. Investors hoping for a respite from volatility got yet another powerful dose, as the stock sell-off that has defied every hope of ending showed itself no respecter of holiday cheer.
During Monday’s mercifully abbreviated Christmas Eve session, the S&P 500 sank 2.7% to 2,351.10 points — down 19.8% from its Sept. 20 close and just seven points above the bear market threshold. Compared with its Sept. 21 intraday high, the index is down 20%.
The Dow Jones industrial average fell 653.17 points on Monday, or 2.9%, to 21,792.20 points. A further decline of 1.5% would put it into its own bear market.
“Even if 20% is just a psychological number, it is psychologically very important,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. “We’ve been trading like we’re already in a bear market for the past few weeks.
“I don’t know if it would create panic,” he added, but if the S&P 500 falls below 2,344.5 points, “that would be very unsettling.”
With every lurch — and there have been a lot lately; the average one-day decline in the S&P 500 this month is 1.6% — markets move closer to becoming a drag on the economy itself. In testimony last week, Fed Chairman Jerome H. Powell indicated he didn’t see the slump as meaning much for the economy, though when he was speaking, the Dow was about 1,500 points higher than it is now.
“The markets going down will eventually create an economic problem,” said Ernesto Ramos, head of equities at BMO Asset Management. “We’re not there yet but getting pretty close. People who spend money as consumers, if they have stock exposure, they’re reconsidering if they’re going to buy a $1,000 present — they’ll buy a $200 one.”
Newspapers are “headlining market drops, the worst month since 2008, or worst week since 2008,” Ramos said. ”All of these headlines are in the front. They’re not buried in some back page. [People are] seeing the market is taking a hit, and their 401(k) is tied to it.”
Although a dozen things have been blamed for the plunge — slowing economic growth, trade tariffs, stretched valuations, Brexit — its latest segment has come amid increasingly frantic emanations from President Trump’s White House. Over the weekend, Treasury Secretary Steven Mnuchin tried to reassure markets that the president had no plans to fire Powell after Bloomberg reported that Trump had discussed the step repeatedly in recent days.
Mnuchin took to Twitter again Sunday to say he’d spoken to heads of the biggest U.S. banks about liquidity and lending infrastructure, and reconvened a presidential working group that was established to sort out the 1987 crash. Stocks never have needed an obvious reason to fall over three months of tumult, but neither of Mnuchin’s gestures steadied the decline. Neither did a fresh tweet Monday from Trump blasting the Fed.
For investors who thought they would spend 2018 basking in the tidings of Trump’s tax overhaul, the slide has been particularly brutal. Little in the economy seems to justify such a steep decline — a danger of ascribing too much cause-and-effect to stock prices. The CBOE Volatility Average, which started the year at 11.04, surged Monday to 36.07.
“Going through the whole month of January, everything was still all systems go, hunky dory, so to speak. But then once the president brought up the tariffs and a trade war, then the entire global economy kind of lost a significant amount of steam,” said Scot Lance, managing director at California-based Titus Wealth Management. “It’s ironic that we’ve come to this bear market, or a potential one — I don’t see how it’s stoppable, frankly — but it’s kind of unprecedented how we have.”
Corporate earnings and the economy are both forecast to slow next year, but neither is anywhere near a full-blown decline. At $173 a share, consensus estimates for S&P 500 companies’ 2019 earnings are down marginally from a few months ago, but they still represent an increase of 35% from last year — not the sort of profit performance usually associated with big stock declines.
The apparent calm in the economy and corporate America is a bitter irony for bulls with a sense of history, considering some of the things that failed to torpedo the decade-long rally in the past. There was the August 2011 stripping of the U.S. government’s AAA credit rating, which led to one of the most volatile stretches ever recorded but no 20% plunge. There was the May 2010 flash crash, which knocked the Dow down as much as 9.2% in one day.
Of all its traumas, the nearest the S&P 500 has been to a 20% plunge in closing levels was in 2011, from April 29 to Oct. 3, when headlines about Europe’s sovereign credit crisis pushed the benchmark within points of a formal bear market. That decline ended with a one-month 10.8% surge, the best monthly return of the bull market.
Going back to the 1940s, there have been 14 bear markets, with half of them taking place during a recession, according to LPL Research. Those that came during an economic downturn were more painful, the S&P 500 falling 37% on average, while in bear markets with no accompanying recession the index lost only 24% at the trough on average.
“As we’ve seen over the past 40 years, if the economy is on firm footing, bears tend to stop around a 20% loss and the occurrences of a massive drop are quite limited,” said Ryan Detrick, LPL senior market strategist.
On Monday, trading was choppy and volume was light ahead of Tuesday’s Christmas holiday. U.S. markets are due to reopen for trading Wednesday.
The S&P 500 had its worst Christmas Eve on record, and for the first time in 2018, all 11 of its sectors ended in the red for the year. The Nasdaq skidded 140.08 points, or 2.2%, to 6,192.92. The Russell 2000 index of smaller-company stocks declined 25.16 points, or 2%, to 1,266.92.
Technology firms, healthcare companies and banks took some of the heaviest losses. Microsoft fell 2.2% to $96.05. Johnson & Johnson declined 4% to $122.99. Wells Fargo slipped 1.9% to $44.26.
Tesla sank 7.6% to $295.39. Netflix slid 5.1% to $233.88.
Nike skidded 5.9% to $68.10, giving back some of the gains it notched after posting strong earnings results last week.
Newmont Mining climbed 3.1% to $34.58 — the biggest gainer in the S&P 500 — as gold prices rose more than 1%.
Oil prices, which have sunk on concerns about the state of the global economy and also oversupply in the market, continued to slide. Benchmark U.S. crude fell 3.1% to $44.18 a barrel in New York. Brent crude, used to price international oils, declined 2.6% to $52.43 a barrel in London.
The decline in oil prices weighed on energy stocks. Hess slumped 8.1% to $38.11.
Bond prices rose. The yield on the 10-year Treasury note fell to 2.77% from Friday’s 2.79%.
The dollar fell to 110.50 yen from 111.31 yen. The euro strengthened to $1.1415 from $1.1370.