U.S. stocks extend losses as traders digest Fed plans, potential government shutdown
Trailing on a global rout Thursday, U.S. stocks dropped deeper into the red as investors digested the Federal Reserve's rate increase and its softer outlook for 2019.
They pitched lower on the news that President Donald Trump would not sign the spending bill that would avert a government shutdown. Also lurking are growing concerns about a slowdown in the global economy.
By midafternoon, the Dow plummeted more than 650 points, or 2.9 percent. The Standard & Poor's 500-stock index was down 2.8 percent. The tech-heavy Nasdaq composite was off 2.8 percent.
"Investors were discouraged by the lump of coal they got in their pre-holiday stockings from Fed Chair Powell," said Sam Stovall, investment strategist at CFRA. "The street was expecting a more dovish-sounding outlook. The Fed is basically saying that with the economy as strong as it is, it can withstand two additional hikes next year. A lot of investors expected the Fed to say, 'One and done.' "
Stocks pitched lower in the late morning, when news came out that Trump would not commit to signing legislation to avoid a partial government shutdown - unless he receives more funding for border security, "which includes steel slats or a wall," White House press secretary Sarah Sanders said.
"The possible shutdown is clearly exerting significant downward pressure on stocks today," said Kristina Hooper, chief global strategist at Invesco.
Ten of 11 S&P sectors were down Thursday, with safe-haven utilities the only positive industry. Leading the way down was technology, with a 2.4 percent drop, and consumer discretionary sliding 2.3 percent.
"It seems investors are showing sensitivity to valuations in this sell-off," Hooper said. "Tech weakness may at least partially reflect concerns about a global slowdown, as tech is the sector with the highest exposure to revenues outside the U.S."
Consumer staples also took a hit, thanks to a 3.5 percent drop in tobacco giant Philip Morris. The company shares were downgraded by Credit Suisse earlier in the week to "underperform." Analysts cited the maker of Marlboro for its reliance on heated tobacco as a reason for the change.
Stovall said malaise in the tech sector was due to a combination of the U.S.-China trade skirmish, the U.S. announcement on Thursday accusing China of a long-term effort to hack into American technology providers and the D.C. attorney general's lawsuit against Facebook, alleging that the social media company shared user information with a client without permission.
Global markets were down across the board after the Federal Reserve on Wednesday lowered its 2019 growth forecast from 2.5 percent to 2.3 percent. It boosted interest rates up a quarter-point, to a range of 2.25 to 2.5 percent, the highest rate in more than a decade - but low by historic standards.
The central bank indicated that it is likely to do only two interest rate increases in 2019, down from earlier forecasts of three increases.
The Dow and the Standard & Poor's 500-stock index are on pace for their worst quarter since 2011 and worst year since 2008. The Dow has fallen 10 percent from its September peak, wiping out all gains for the year. Other markets, especially high-yield debt, are also showing signs of stress and making it more difficult for companies to borrow money.
The economy remains "healthy" and "solid," Fed Chairman Jerome Powell said at a news conference Wednesday. He said he did not see any reason to sharply change the Fed's path of gradually pulling back support for it. But he acknowledged that the economy is showing signs of "softening," and there is a "fairly high degree of uncertainty" about what the Fed will do.
Oil prices kept up their steep, three-month decline, with West Texas Intermediate slipping beneath $45 per barrel and Brent Crude down to $55 per barrel. The $50 per barrel is a key threshold for oil because producers find it more difficult to make money below that mark.
"There is full-out skepticism now about the ability of Russia and OPEC to sufficiently cut supplies," said John Kilduff of Again Capital. "The problem that occurred last night was Saudi Arabia, despite the promise to cut, said it would still supply Asia. That undercut any credibility about the implementation of the cuts."
Oil is down 35 percent from its 52-week high, with no sign of rising. The recent drop came overnight on news that Saudi Arabia is going to make good on its oil contracts to Asia, despite a deal earlier this month between the Organization of the Petroleum Exporting Countries and non-OPEC Russia to cut production by 1.2 million barrels per day.
"People are questioning the OPEC impact on supply," said Frank Verrastro of the Center for Strategic and International Studies. "The cuts are supposed to take effect Jan. 1. But everything that is being put on ships in December will be delivered in January and February. So you are not going to see a 1.2 million barrel production cut in January."
Powell made it clear that the Fed will no longer provide the training wheels for stock markets.
"By pretty much ignoring the recent financial market turmoil and focusing on continued economic strength, Powell put the markets on notice that the Fed will be much less willing to shape monetary policy in order to support asset prices," said Brad McMillan, chief investment officer for Commonwealth Financial Network. "With the Fed stepping back, markets will be on their own in a way they have not been for decades."
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