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Dow dives 500 points as stocks close near 2018 lows

CNBC logo CNBC 12/17/2018 Thomas Franck
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Stocks sank Monday, pushing the S&P 500 to its lowest level of the year as investors grew increasingly worried that the Federal Reserve's plan to raise interest rates could be too much for the economy and stock market to handle.

The S&P 500 fell as much as 2.5 percent to 2,530, surpassing its February low of 2,532. The Dow lost more than 500 points, bringing its two-day losses to more than 900 points. Shares of Amazon and Goldman Sachs led the declines.

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 7 percent so far for the month. The S&P 500 is now down more than 4 percent for the year.

The Cboe Volatility Index, one of Wall Street's favorite gauges of market fear, hit 23.79, its highest level since Dec. 10 and volume for the stock market was heavier than usual. The tech-heavy Nasdaq Composite dropped 2.5 percent as Microsoft dropped nearly 3.6 percent. The Russell 2000 — which tracks the performance of smaller companies — entered a bear market, down 20 percent from its 52-week high.

DoubleLine Capital CEO Jeffrey Gundlach said Monday that he "absolutely" believes the S&P 500 will go below the lows that the index hit early in 2018.

"I'm pretty sure this is a bear market," Gundlach told Scott Wapner on CNBC's "Halftime Report. The major averages fell to session lows following his comments.

Related video: Not seeing Santa Claus rally yet, says trader

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The Fed is expected to hike its benchmark overnight lending rate for a fourth and final time of 2018 on Wednesday. While fears of rising interest rates and an ambitious central bank have spooked markets throughout 2018, such concerns have heightened over the past month as inflation and growth expectations recede.

"With increased stock market volatility and signs of slower growth overseas, there are increasing calls for the Fed to halt its rate increases," wrote David Kelly, chief global strategist at JPMorgan Funds. "This is where the Fed needs to keep its head first, because current Fed policy is neither too aggressive nor too tight and second, because a change of course at this point could undermine confidence."

President Trump doubled down on his criticism of the Fed's rate hiking path on Monday, lambasting the central bank for "even considering" another rate hike just days before its final meeting of the year.

The so-called yield curve remains partially inverted, with the yield on benchmark 2-year Treasury notes exceeding the rate on 5-year notes. The recent fall in interest rates, as well as marked flattening in the yield curve, has pushed bank stocks lower, with the SDPR S&P Bank ETF down more than 20 percent in the past six months.

"Bond King" Gundlach later added that he still believes yields will move higher as the U.S. Treasury continues to auction tens of billions of dollars worth of debt.

Recent economic data have reignited worries of economic slowdown around the globe and kept a lid on stock returns. The Dow fell nearly 500 points and the S&P 500 closed down 1.9 percent on Friday to 2,599.95 — its lowest closing level since April — after China reported industrial output and retail sales growth numbers for November that missed expectations.

Meanwhile, New York manufacturers reported on Monday that business activity is still expanding, but growth slower much more than expected in December. The Empire State Manufacturing Survey's general business conditions index, aggregated by the Federal Reserve Bank of New York, fell to 10.9 from 23.3 in November, falling short the 20.6 print expected by economists polled by Refinitiv.

Homebuilder sentiment fell to its lowest level since May 2015 in December as potential buyers delay purchasing new homes despite a pullback in mortgage rates in the past month. Sentiment declined four points in December to 56, well below December 2017's print of 74, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

"With just ten trading sessions left for stocks in 2018 the chance of a Santa Claus rally appears less than slim," John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, wrote Monday. "Sentiment remains sour toward stocks even as fundamentals and relatively cheap valuations leave stocks poised to move higher in the New Year."

Shares of Goldman Sachs fell 2.6 percent Monday after Malaysian authorities filed criminal charges against the bank and two former partners in connection with the 1MDB financial scandal.

The company is under fire for its role in helping raise $6.5 billion through three bond offerings for 1Malaysia Development Bhd (1MDB), which is the subject of investigations in at least six countries.

Electronics retailer Best Buy was on track for a rough day on Wall Street after Bank of America Merrill Lynch downgraded its stock to underperform on concerns of slowing sales.

BofA cited "deceleration in industry growth trends and continued caution on key product categories such as TVs, Apple products and gaming," stated the Monday note by analyst Curtis Nagle. The downgrade — and worries of softer sales — comes during one of the most important times of the year for the consumer technology retailer as shopper flock to purchase holiday gifts.

Best Buy's stock fell more than 5.2 percent.

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