December 20, 2018 4:56 pm

Dow Jones dives another 400 points on fears of U.S. slowdown

WATCH ABOVE: How investors can protect themselves from market slump

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Stock prices are tumbling again Thursday as a series of big December plunges has stocks on track for their worst month in a decade. The Dow Jones Industrial Average dropped 400 points, bringing its losses since Friday to more than 1,600 points.

The benchmark S&P 500 index has slumped 10 per cent this month and is almost 16 per cent below the peak it reached in late September. The technology-heavy Nasdaq composite is down almost 20 per cent from its record high in August.

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After steady gains through the spring and summer, stocks have nosedived in the fall as investors worry that global economic growth is cooling off and that the U.S. could slip into a recession in the next few years. The S&P 500 is on track for its first annual loss in a decade.

READ MORE: World stock markets tumble following arrest of Huawei executive in Canada

The market swoon is coming even as the U.S. economy is on track to expand this year at the fastest pace in 13 years. Markets tend to move, however, on what investors anticipate will happen well into the future, so it’s not uncommon for stocks to sink even when the economy is humming along.

Right now, markets are concerned about the potential for a slowing economy and two threats that could make the situation worse: the ongoing trade dispute between the U.S. and China, which has lasted most of this year and shows few signs of easing, and rising interest rates, which act as a brake on economic growth by making it more expensive for businesses and individuals to borrow money.

WATCH: U.S. Federal Reserve lifts rates, sees ‘some further’ hikes ahead

The selling in the last two days came after the Federal Reserve raised interest rates for the fourth time this year and signaled it was likely to continue raising rates next year, although at a slower rate than it previously forecast.

Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said that Fed Chairman Jerome Powell didn’t appear concerned about the state of the U.S. economy, despite deepening worries among investors that growth could slow even more in 2019 and 2020. Wren said investors want to know that the Fed is keeping a close eye on the situation.

“He may be a little overconfident,” said Wren. “The Fed needs to be paying attention to what’s going on.”

Powell also acknowledged that the Fed’s decisions are getting trickier because they need to be based on the most up-to-date figures on jobs, inflation, and economic growth. For the last three years the Fed told investors weeks in advance that it was almost certain to increase rates. But things are less certain now, and the market hates uncertainty.

READ MORE: U.S. hikes interest rates for 4th time this year

Treasury Secretary Steven Mnuchin said the market’s reaction to the Fed was “completely overblown.”

Investors have responded to a weakening outlook for the U.S. economy by selling stocks and buying ultra-safe U.S. government bonds. The bond-buying has the effect of sending long-term bond yields lower, which reduces interest rates on mortgages and other kinds of long-term loans. That’s generally good for the economy.

At the same time, the reduced bond yields can send a negative signal on the economy. The bond market has correctly predicted several previous U.S. recessions by buying long-term bonds and sending yields down.

At 3 p.m. Eastern time, the S&P 500 index was down 34 points to 2,472, its lowest since September 2017.

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The Dow fell 414 points, or 1.8 per cent, to 22,909. The Nasdaq composite shed 98 points, or 1.5 per cent, to 6,538.

The Russell 2000 index of smaller companies dropped another 22 points, or 1.7 per cent, to 1,326.

Smaller company stocks have been crushed during the recent market slump because slower growth in the U.S. will have an outsize effect on their profits. Relative to their size, they also tend to carry more debt than larger companies, which could be a problem in a slower economy with higher interest rates.

The Russell 2000 is down almost 24 per cent from the peak it reached in late August and it’s down 13.5 per cent for the year to date. The S&P 500, which tracks larger companies, is down 7.5 per cent.

READ MORE: U.S.-China tariff truce boosts global stocks, but greenback falls

The possibility of a partial shutdown of the federal government also loomed over the market on Thursday, as funding for the government runs out at midnight Friday. In general, shutdowns don’t affect the U.S. economy or the market much unless they stretch out for several weeks, which would delay paychecks for federal employees.

Oil prices continued to retreat. Benchmark U.S. crude fell 4.8 per cent to $45.88 a barrel in New York, and it’s dropped 40 per cent since early October. Brent crude, used to price international oils, slipped 5 per cent to $54.35 a barrel in London.

After early losses, bond prices headed lower. The yield on the two-year Treasury rose to 2.67 per cent from 2.65 per cent, while the 10-year note rose to 2.78 per cent from 2.77 per cent.

The gap between those two yields has shrunk this year. When the 10-year yield falls below the two-year yield, investors call it an “inverted yield curve.” That hasn’t happened yet, but investors fear it will. Inversions are often taken as a sign a recession is coming, although it’s not a perfect signal and when recessions do follow inversions in the yield curve, it can take a year or more.

WATCH: U.S. stocks drop to new low as world stocks, oil tumbles

“The bond market has been telling us something for about a year, and that is there’s not going to be much inflation and there’s not going to be a sustained surge in economic growth,” said Wren, of Wells Fargo.

In France, the CAC 40 lost 1.8 per cent and Germany’s DAX fell 1.4 per cent. The British FTSE 100 slipped 0.8 per cent. Indexes in Italy, Portugal and Spain took bigger losses.

Tokyo’s Nikkei 225 lost 2.8 per cent and Hong Kong’s Hang Seng gave up 1 per cent. Seoul’s Kospi shed 0.9 per cent.

As investors adjusted to the prospect of a weaker economy and lower long-term interest rates, the dollar fell to 110.90 yen from 112.36 yen. The euro rose to $1.1483 from $1.1368. The British pound rose to $1.2688 from $1.2621. That sent the price of gold higher, and it gained 0.9 per cent to $1,267.9 an ounce. Silver rose 0.3 per cent to $14.87 an ounce and copper, which is considered an indicator of economic growth, fell 0.7 per cent to $2.70 a pound.

Other fuel prices also fell. Wholesale gasoline lost 4.6 per cent to $1.32 a gallon and heating oil slid 3.1 per cent to $1.75 a gallon. Natural gas gave up 3.8 per cent to $3.58 per 1,000 cubic feet.

© 2018 The Canadian Press

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