Wall Street plunged for the second successive day on Thursday as investors remained worried about the Fed pursuing quantitative tightening. Concern regarding a partial government shutdown from mid-night Dec 21 also weighed on investor sentiment. A highly volatile stock market has dented investors’ confidence in risky assets like equities significantly. All three major stock indexes finished in negative territory.
The Dow Jones Industrial Average (DJI) closed at 22,859.60, declining 2% or 464.06 points. The S&P 500 Index (INX) lost 1.6% to close at 2,467.42. Meanwhile, the Nasdaq Composite Index (IXIC) closed at 6,528.41, shedding 1.6% or 108.42 points. A total of 12.09 billion shares were traded on Thursday, higher than the last 20-session average of 8.38 billion shares. Decliners outnumbered advancers on the NYSE by 3.97-to-1 ratio. On the Nasdaq, decliners had an edge over advancers by 3.41-to-1 ratio. The CBOE VIX increased 11% to close at 28.38.
How Did the Benchmarks Perform?
The Dow ended in negative territory for the second straight day after recording its lowest close since October 2017. During Tuesday’s trading the blue-chip index was up 288 points at its highest point and fell 799 points at the session-low. Notably, 29 components of the 30-stock index finished in the red while only one finished in the green.
The S&P 500 also ended in negative territory for the second consecutive day. The benchmark index posted its lowest close since September 2017. The Energy Select Sector SPDR (XLE) and Consumer Discretionary Select Sector SPDR (XLY) are major losers with losses of 2.8% and 2.2%, respectively. Notably, all 11 sectors of the broad-market index closed in the red.
The tech-heavy Nasdaq Composite ended in the red for the second successive day due to weak performance by large-cap tech giants. The tech-laden index posted its lowest close since October 2017. During Wednesday’s trading, Nasdaq fell into bear market territory though ultimately managed to break above this zone.
Fed Hikes Rate and Pursues Quantitative Tightening
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. However, the Fed lowered its projected rate hikes for 2019 from three to two. Despite the Fed’s assurance of lowering the pace of rate hikes, Wall Street remained extremely volatile over the last two days.
Investors remain highly concerned about the 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 debt 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 prices and higher yields. Consequently, interest rates will go up in the long term.
On Dec 18, Senate Majority Lead Mitch McConnell said that a proposed short-term government funding plan worth $5 billion for border security fencing was rejected by Democrat representatives. Notably, if a spending billremains unapproved several government agencies face the risk of a shutdown.
On Dec 20, President Trump refused to sign a Senate-approved appropriations bill that would avert a government shutdown. Trump stated categorically as long as both houses of Congress refuse to allocate $5 billion in funds for expansion of the U.S. southern border wall, he will not sign a crucial spending bill. Investors fear that a partial government shutdown is likely to start from mid-night Dec 21.
Department of Labor reported that U.S. jobless claims increased 8,000 to a seasonally adjusted 214,000 for the week ended Dec. 15. This figure was lower than the consensus estimate of 218,000. Notably,the four-week moving average of the continuing claims rose 6,750 to 1.67 million.
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