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Dow dives 400 points to end its worst week in 10 years

CNBC logo CNBC 12/21/2018 Thomas Franck


Stocks plunged again Friday, bringing the Dow Jones Industrial Average's losses for the week to nearly 7 percent and ending its worst week since the financial crisis in 2008. The Nasdaq Index fell into a bear market, and the S&P 500 was on the brink of one itself, down nearly 18 percent from its record earlier this year.

The Federal Reserve's rate hike Wednesday drove the losses this week and fears of an extended government shutdown only added to the pain on Friday.

The Dow lost 414 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.

But those gains slowly disappeared as investors used that short-term pop as a chance to sell more. The broader S&P 500 fell 2 percent on Friday, while the tech-heavy Nasdaq shed 2.99 percent, with big losses in technology stocks, including Facebook, Amazon and Apple.

Stocks accelerated to their lows after President Donald Trump's trade adviser, Peter Navarro, told Nikkei that it would be "difficult" for the U.S. and China to arrive at a permanent economic agreement after a 90-day ceasefire in the trade tensions.

Here's a tally of the carnage:

The Dow lost 7 percent and nearly 1,600 points on the week. It was its worst percentage drop since October 2008.

The Nasdaq lost 8.2 percent on the week and is now 22 percent below its record reached in August, a bear market.

The S&P 500 lost 7 percent for the week and is now down 17.7 percent from its record.

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 12 percent each this month.

Both the Dow and the S&P 500 are now in the red for 2018 by at least 9 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."

On Thursday, the Dow Jones Industrial Average dropped 464.06 points to close at 22,859.6, bringing its two-day declines — which encompassed the market's reaction to the Fed's rate hike — to more than 800 points. The S&P 500 shed 1.58 percent to end Thursday at 2,467.41 while the Nasdaq Composite fell 1.6 percent and closed at 6,528.41. The Cboe Volatility Index — one of Wall Street's best gauges of marketplace fear — rose above 30 on Thursday, its highest level since February.

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.

But equities 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's comments 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 PresidentTrump 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.

However, Trump later told reporters on Friday that there is a very good chance the House funding bill will not pass in the Senate and that the administration is prepared for a long shutdown.

"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.

Technology and financial stocks were among the biggest losers on Friday.

Facebook lost 6.4 percent, Apple lost 3.6 percent and Amazon lost 5.6 percent. Chipmakers Nvidia and Advanced Micro Devices lost 4.2 percent and 5.7 percent, respectively.

The big banks of Wall Street also sank, with Goldman Sachs falling 4.9 percent, Citigroup down 4.3 percent and Bank of America down 3.1 percent.

Athletic apparel company Nike was one of the few bright spots rallying nearly 7 percent following strong earnings results.

CNBC's Sam Meredith, Eustance Huang, Kate Rooney and Jacob Pramuk contributed to this report.


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