Stock Selloff Deepens
All of Wall Street’s major indexes headed for deep losses, extending a week-long losing streak that threatens to unravel a decade-long bull market. The Dow Jones Industrial Average fell more than 400 points toward new yearly lows. At the time of writing, 27 of 30 index members had reported losses.
The broader S&P 500 Index plunged 1.6% to 2,466.84, where it was on track for its lowest settlement since August 2017. Ten of 11 primary sectors contributed to the selloff, with consumer discretionary and information technology shares leading the downtrend. The utilities sector, which is normally considered a defensive play, was the lone gainer Thursday afternoon.
Sliding tech shares pushed the Nasdaq Composite Index to the brink of a bear market, which is usually defined as a decline of 20% or more from the most recent peak. The tech-heavy average was last down 1.7% at 6,524.53.
The CBOE Volatility Index, also known as the VIX, approached 29.00 on the scale of 1-100 where 20.00 represents the historic mean. The so-called “fear index” is up nearly 10% at the time of publication and has gained a whopping 131% this year. VIX usually trades inversely with the S&P 500 and sharp moves above the historic mean signal bearish conditions for stocks.
The following chart highlights this inverse relationship:
Factors Behind the Downtrend
The Nasdaq’s encroachment on bear-market territory signals a major paradigm shift for Wall Street and a huge role reversal from the record-breaking third quarter. A dangerous combination of trade risks, slowing global growth and a deflating tech sector have all contributed to the meltdown in stocks.
Equity markets sold off late Wednesday after investors miscalculated the Federal Reserve’s forward guidance on monetary policy. Although a fourth rate-hike was widely priced into the market, investors expected a bigger downward revision to next year’s rate projections. Instead, the Fed lowered its outlook for rate rises next year to two from three, one more than what analysts had expected.
President Donald Trump is a vocal critic of the Fed’s policies and has urged the central bank to avoid tightening monetary policy so aggressively.
“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike,” Trump tweeted on Monday ahead of the Federal Reserve’s two-day meeting in Washington. “Take the Victory!”
It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!
— Donald J. Trump (@realDonaldTrump) December 17, 2018
The Trump administration’s trade war with China will dominate the headlines heading into 2019. Although progress has been made during the self-imposed 90-day truce, a comprehensive free trade deal remains elusive. As reported earlier this week, Chinese President Xi Jinping appeared defiant in a recent address to the Communist Party in Beijing, where he heralded his country’s return to economic power.