U.S. stocks declined sharply for the third successive day on Friday as investors remained skeptical about Fed’s monetary stance in 2019 and fear of a long-term partial government shutdown. Moreover, conflicting news on the United States – China trade war front also aggravated the situation. All three major stock indexes closed in negative territory for the day as well as for the week as a whole.
The Dow Jones Industrial Average (DJI) closed at 22,445.37, declining 1.8% or 414.23 points. The S&P 500 Index (INX) lost 2.1% to close at 2,416.62. Meanwhile, the Nasdaq Composite Index (IXIC) closed at 6,332.99, shedding 3% or 195.41 points.
A total of 15.18 billion shares were traded on Friday, higher than the last 20-session average of 8.81 billion shares. Friday’s share trading volume was highest single day transactions since August 2011. Decliners outnumbered advancers on the NYSE by 3.57-to-1 ratio. On the Nasdaq, decliners had an edge over advancers by 3.77-to-1 ratio. The CBOE VIX increased 6.1% to close at 30.11.
How Did the Benchmarks Perform?
Notably, all three major stock indexes are currently under correction territory and in the red year to date. The Dow ended in negative territory for the third straight day after recording its lowest close since October 2017. Notably, 27 components of the 30-stock blue-chip index finished in the red while only three finished in the green.
The S&P 500 also ended in negative territory for the third consecutive day. The benchmark index posted its lowest close since July 2017. The Communications Services Select Sector SPDR (XLC) and Technology Select Sector SPDR (XLK) lost 3.6% and 3.5%, respectively. Each of the Consumer Discretionary Select Sector SPDR (XLY) and Real Estate Select Sector SPDR (XLRE) declined 2.6%. Both Financials Select Sector SPDR (XLF) and Industrials Select Sector SPDR (XLI) dropped 2.5%. Notably, all 11 sectors of the broad-market index closed in the red for second straight day.
The tech-heavy Nasdaq Composite ended in the red for the third successive day due to weak performance by FAANG stocks. The tech-laden index posted its lowest close since August 2017. At Friday’s close, Nasdaq Composite fell into bear market as it closed 21.9% drown from its recent high posted on Aug 29. Shares of Facebook Inc. (FB - Free Report) and Netflix Inc. (NFLX - Free Report) declined 6.3% and 5.5%, respectively. Both stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fed’s Tight Monetary Stance
On Dec 19, the Fed raised benchmark lending target rate by 0.25% to the range of 2.25-2.50%. This was the fourth rate hike by the central bank in 2018. Investors are now concerned regarding two more rate hikes in 2019 and continuation of Quantitative Tightening through which the central bank is reducing the size of its balance sheet by $50 billion each month by redeeming government debts and mortgage bonds.
This implies that a massive $600 billion will not be invested in sovereign bonds in 2019. This will significantly reduce demand for U.S. government bonds, resulting in lower bond price and higher yields. Consequently, interest rate will go up in the long term.
Concerns Over Partial Government Shutdown
On Dec 21, President Donald Trump tweeted that if the U.S. Congress does not approve $5 billion or more for the construction of a wall or “steel slats” at the United States – Mexico border, then it is likely to escalate to long-term partial shutdown of the U.S. government.
Notably, on Dec 18, Senate Majority Lead Mitch McConnell said that a proposed short-term government funding plan worth $5 billion border security fencing was rejected by Democrat representatives. Notably, Trump needs Democrat support in Senate to pass the bill.
Consequently, partial government shutdown commenced since mid-night Dec 21. With both President Trump and Democrats resolutely standing their ground, remain resolutely opposed, the ongoing shutdown is likely to persist.
Conflicting News on US-China Trade War
On Dec 21, Peter Navarro, President Trump's trade adviser said that it is highly unlikely that the United States and China will arrive at a permanent economic agreement during the 90-day ceasefire period agreed by both sides.
However, on Dec 19, Treasury Secretary Steven Mnuchin said that the United States and China will meet in January 2019 to seek an amicable solution to its long running trade war. Munchin further added, the two sides are engaged in telephonic conversation and a face-to-face meeting is around the corner. Chinese officials also confirmed Munchin’s statement.
The Department of Commerce has marginally reduced its estimate for the third quarter 2018 U.S. GDP from 3.5% to 3.4%. This was the third and final estimate of the third quarter GDP. Personal income in November grew 0.2% to $40.2 billion.
The PCE price index increased 1.6% compared with an increase of 2.0% in the second quarter. Excluding food and energy prices, the PCE price index increased 1.6%, compared with an increase of 2.1% in the second quarter. Corporate profits increased $78.2 billion in the third quarter compared with an increase of $65.0 billion in the second quarter.
Orders for U.S. durable goods increased 0.8% in November reversing a stiff decline of 4.3% in October. However, business spending plan declined 0.6% in November, its third drop in last four months.
The third week of December was a devastating on for Wall Street. The Dow declined 6.9%, its worst weekly performance since October 2008. The S&P 500 and Nasdaq Composite slid 7.1% and 8.4%, respectively. Also Friday’s close marked these two indexes’ lowest weekly closed since 2008 and 2011, respectively.
The recent rate hike and Fed’s tight monetary policy, fear of partial government shutdown, conflicting news related to trade war between the United States and China and concerns of a global economic slowdown have significantly dented investors confidence.
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