S&P 500 slides into bear market territory
Broader US stock index ends more than 20% below previous peak on intraday basis
The broader US stockmarket index slid into a bear market on Monday as investors reacted negatively to US Treasury secretary Steven Mnuchin’s highly unusual effort to reassure investors about Wall Street banks’ liquidity.
The S&P 500 finished the holiday-shortened day down 2.7 per cent at 2,351, or more than 20 per cent below its previous intraday peak in September. It marks the worst Christmas Eve trading day on record.
Mr Mnuchin’s attempt to buoy confidence was also undercut by President Donald Trump’s continued assault on the Federal Reserve, further playing on investor jitters.
“When you have the market already worried about where we are in the cycle, incremental political instability on top of that is pretty difficult for the market to digest,” said Greg Boutle, head of US equity and derivatives strategy at BNP Paribas.
The half-day of trading on Wall Street saw the Dow Jones Industrial Average drop 2.9 per cent to 21,792, while the tech-heavy Nasdaq Composite, already in bear market territory, lost another 2.2 per cent to 6,193. The political tensions surrounding the continued US government shutdown since Friday night also weighed on the dollar, down 0.5 per cent against a basket of other currencies.
Mr Mnuchin’s said on Sunday that the chiefs of the country’s biggest banks had confirmed to him that they had “ample liquidity for lending to consumer, business markets, and all other market operations” — a matter that had not been a widespread point of concern.
Mr Mnuchin also convened a call on Monday with the President’s Working Group on Financial Markets, which includes Fed governors, along with regulators from the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation.
One person familiar with the conference call said it was a “check-in call” that discussed the functions of different agencies during the federal government shutdown. Some Treasury functions are also affected by the shutdown.
Mr Mnuchin’s statement on the weekend appeared to be an attempt by the administration to calm nerves after a volatile week for traders, and dispel media reports that President Donald Trump was contemplating firing Jay Powell, Federal Reserve chairman.
But Mr Trump did not aid that effort as he continued his assault on the Fed on Monday morning from Washington, DC, where he remains through the holiday week due to the shutdown.
“The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” Mr Trump tweeted on Monday.
Win Thin, global head of currency strategy at Brown Brothers Harriman, warned that among traders, “sentiment is so negative right now that markets will assume the worst” about any suggestion that Mr Trump could seek to remove Mr Powell.
“Until this weekend, markets were not that concerned about liquidity or clearance issues,” Mr Thin said. “At best, Mnuchin made a rookie policy mistake in trying to reassure markets; at worst, Mnuchin knows something that the markets don’t.”
European markets also appeared to respond to the uncertainty — the FTSE 100 closed down 0.5 per cent in thin pre-Christmas trading on Monday, with the pan-European Stoxx 50 closing down 0.9 per cent.
Brent crude fell 1.8 per cent to $52.86, it’s lowest level in 16 months.
In Asia, equity trading was muted, with markets in Japan shut for a holiday and many others closing early for Christmas.
China’s CSI 300 ended the day up 0.3 per cent and Hong Kong’s Hang Seng index finished a shortened session down 0.4 per cent. In Australia the S&P/ASX 200 rose 0.5 per cent while South Korea’s Kospi Composite slipped 0.2 per cent.
The accelerating sell-off into the equity market close prompted a move lower for US Treasury yields. The 10-year yield dropped 6 basis points from Friday’s close to 2.73 per cent, it’s lowest level since April.
Can Trump fire Fed chairman Jerome Powell?
While President Trump may have hand-picked Jerome Powell for the job of chair of the Federal Reserve less than one year ago, he hasn’t been shy about voicing his disappointment in his performance over last few months.
On multiple occasionsOpens a New Window. , Trump has expressed his desire to terminate Powell over raising interest rates that have led to big market sell-offs. In a Christmas Eve tweet, Trump said the Fed was the only problem the U.S. economy has.
Despite the stock market’s big sell-off, does Trump have the power to fire Powell if he wanted to?
The short answer is that no one knows for sure as no president has ever attempted it before.
According to the Fed’s website, while the president appoints the Fed’s board of governors, including the chairman, the central bank derives its authority from Congress, which created the System in 1913 with the enactment of the Federal Reserve Act.
This means that the board reports to and is directly accountable to Congress but, “unlike many other public agencies, it is not funded by congressional appropriations.”
However, according to the Federal Reserve Act, the only way Trump could remove Powell or any other governor of the central bank is “for cause.” For example, if Powell broke the law that could be construed as adequate “cause” for his dismissal.
Even then, from a purely legal perspective, such a termination would have to be contested by Powell in court and then it would still fall to the courts to decide whether Trump had adequate cause for Powell’s termination.
Closing Market Summary: Broad-Based Retreat Leaves Little Joy on Wall Street
The S&P 500 fell 2.7% on Monday, as follow-through selling and unsettling developments in Washington served to further dampen investor sentiment. Trading action was cut short with the stock market closing early ahead of Christmas Day.
The Dow Jones Industrial Average lost 2.9%, the Nasdaq Composite lost 2.2%, and the Russell 2000 lost 2.0%.
The major indices entered the session with the Dow and Nasdaq having their worst weeks since the financial crisis and the S&P 500 having its worst week since August 2011.
The inability of the major indices to launch a sustainable rebound effort from oversold conditions contributed to the notion that the market has yet to hit a bottom. Accordingly, buyers went on strike again and stocks succumbed to another broad-based effort to cut exposure to the equity market.
A nettlesome headline that dampened investor sentiment involved the news that Treasury Secretary Steven Mnuchin made an unexpected call to the CEOs of the nation's six largest banks on Sunday. That call was intended to shore up confidence in the U.S. financial system at a time of heightened market volatility, yet it proved unsettling to the market giving its timing, which followed on the heels of a huge loss for stocks last week, the start of a partial government shutdown, and rumors, which were refuted by Mr. Mnuchin, that President Trump had discussed firing Fed Chair Powell
President Trump for his part tweeted during today's session that, "...the only problem our economy has is the Fed."
The heightened sense of uncertainty in the market fueled another clear-cut effort to reduce equity exposure. The clearest sign of that effort to reduce exposure to the stock market in general was today's worst-performing sector: the utilities sector (-4.3%), which is often looked at as a "safe-haven" sector during market downturns. That sector, however, led today's downturn, reflecting the pervasive sense of negativity hanging over the stock market.
All 11 S&P 500 sectors declined at least 2.0% and the major indices all closed at their lows for the day.
The CBOE Volatility Index (VIX), which is often referred to as Wall Street's "fear gauge," rose 18.8% to 35.76 -- its highest level since Feb. 9.
U.S. Treasuries remained higher ahead of the bond market's close at 2:00 p.m ET, pushing the benchmark 10-yr yield down five basis points to 2.74% in a flight-to-safety trade. The U.S. Dollar Index lost 0.5% to 96.50.
Investors did not receive any notable economic data on Monday. As a reminder, the stock and bond markets will both be closed Tuesday for Christmas.
- Nasdaq Composite -10.3% YTD
- Dow Jones Industrial Average -11.8% YTD
- S&P 500 -12.1% YTD
- Russell 2000 -17.5% YTD
Early premarket gappers
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