By Will Martin/Business Insider
December 18, 2018

The US stock market’s horrible year looks set for a particularly nasty ending, with both the S&P 500 and the Dow Jones Industrial Average on track for their worst ends to the year since 1931.

The S&P 500 is headed down 7.8% in December. If it were to close at that level or lower, it would mark the index’s worst performance in the year’s final month since 1931, when it closed with a plunge of about 15%. The same is true of the Dow, which has dropped more than 7% since December 1. (The Dow plummeted 17% in December 1931.)

Those losses would eclipse the most recent major slump, in 2002, when both the S&P and the Dow dropped about 6% in December.

Traditionally, stocks climb into the year-end in what is known colloquially as the “Santa rally” — a phenomenon in which stocks rise in December as investors are filled with festive cheer and optimism.

Occasionally, however, no such rally materializes, and 2018 is shaping up to be one of those years, with analysts describing the market’s December run as “Grinch-like.”

A bad omen for 2019

Morgan Stanley, which sees a 50% or higher chance of a recession next year, is worried that things could get even worse. The bank said the US economy could slow even more than markets expect and prompt a bigger sell-off to start the year.

“At this point, the market is pricing in a material slowdown next year as sentiment and positioning have reached levels not seen since the last recession scare in early 2016,” the US equity strategy team said.

Ahead of a Wednesday policy meeting at the Federal Reserve, markets across the board are lower, with European stocks dropping during Tuesday-morning trade, pushed lower by the worries across the Atlantic.

Here’s the state of play in markets:

  • European stocks are lower, with Germany’s DAX slipping 0.35% and Britain’s FTSE 100 down more than 0.7%.
  • Asian equities also endured a tough day, with China’s benchmark Shanghai Composite index losing 0.8%.
  • US futures are pointing to a minor rebound on Tuesday after stocks fell more than 2% during Monday trading. The S&P, the Dow, and the Nasdaq are all set to open about 0.2% to 0.3% higher.
  • Both major oil benchmarks have dropped to 15-month lows on the day, as fears of market oversupply help subdue the commodity. West Texas Intermediate crude is down more than 3.5%, trading at $48.41 a barrel, while Brent crude is down a similar margin, trading at $57.55.
  • Gold is flat on the day, trading at 0.00% difference from its opening price.

Worries about the Fed

Much of the weakness in the US market this month has been attributed to worries about the future path of Fed policy. At its meeting on Wednesday, the Fed is widely expected to raise interest rates for the fourth time in 2018.

Investors, however, are worried that the Fed may signal numerous hikes in 2019, which many believe could stall US economic growth.

“The market’s overriding fear is that the Fed will press ahead with plans to raise interest rates, which could be too much for the US economy to handle,” Jasper Lawler of London Capital Group said in an email on Tuesday.

“An indication from the Fed that they will slow their pace of hikes could calm these jittery markets,” he said. “However, until the Fed have confirmed that as a course of action, investors will remain skittish.”

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