For a second day, stocks got smoked.
On Thursday, the major averages were down more than 1% across the board with the biggest decline coming from the Dow as the blue-chip index saw its two-day losses top 1,300 points with a 545-point, or 2.1% drop, on Thursday. The blue chip index is now up just 1.3% this year.
The benchmark S&P 500 fell 2% on Thursday, adding to its 3% decline on Wednesday, and is now up 2% for the year after having seen gains in excess of 7% for the year through September. All 11 sectors of the S&P 500 finished in the red on Thursday with energy seeing the sharpest losses.
The tech-heavy Nasdaq was a relative outperformer on Thursday, dropping 1.2% as Facebook (FB) shares rose 1.3% in a rough day for the broader market while Apple (AAPL), Alphabet (GOOGL), and Microsoft (MSFT) all declined less than 1%.
Stocks have now declined for six-straight days, the longest streak of President Donald Trump’s time in office.
Still, the major averages finished not far off their lows of the session, leaving a messy picture for investors into the final trading day of the week. The technical damage that’s been done to the market is considerable, with the S&P 500 now at its most oversold since August 2015, according to Bespoke Investment Group. Thursday was also the S&P 500’s first close below its 200-day moving average in 135 trading days.
“We still think the bull market deserves the benefit of the doubt, but this is going to take some time,” Keith Lerner, chief market strategist at SunTrust, told Yahoo Finance on Thursday. “For investors, I think you have to just deal with what’s going on and realize this is the admission price for the stock market. This is the 17th pullback of at last 5% during this bull market.”
In other words, the market’s recent correction will not be fixed on Friday, even if markets rally.
And while the two-day sell-off has captured the focus of investors, Friday will mark the unofficial start of third quarter earnings season, with big U.S. banks leading the way as JP Morgan (JPM), Citi (C), Wells Fargo (WFC), and PNC (PNC) are all slated to report in the morning.
Investors will be looking for commentary from firms on how higher interest rates are impacting their business, the state of the U.S. housing markets, and JP Morgan CEO Jamie Dimon’s often colorful comments will be closely tracked.
And on the economic data side investors will get the September report on import prices on Friday as well as the first look at consumer sentiment in October from the University of Michigan. These reports will not likely be market movers.
Trump vs. the Fed
A number of factors have been cited as pressuring the stock market this week.
Higher rates, inflation, higher commodity costs, disappointing earnings, and a potential slowdown in the U.S. economy. But few debates this week have gotten more attention from economists on Wall Street than the one-sided conversation happening right now between President Donald Trump and the Federal Reserve. Namely, Trump’s continued insistence that the central bank is making a mistake raising interest rates.
On Tuesday, Trump told reporters that he didn’t like that the Fed has been raising interest rates, a comment that was but the latest in a series of comments from the President this year about the Fed’s decision to raise its benchmark interest rate target range by 25 basis points three times in 2018.
On Wednesday, Trump said, “I think the Fed has gone crazy.” And on Thursday, Trump more explicitly tied the Fed’s rate hikes to the stock market, saying, “It’s a correction that I think is caused by the Fed and interest rates.”
This is not a story that is going away.
And while the President’s comments on Fed policy have largely been seen as political theater the market is safe to ignore, the continued stream of talk about monetary policy has made potential changes in the Fed’s forecast likely to be perceived as political.
Because although the Fed maintains that it will adjust the path of interest rate increases based on economic data it receives, the central bank is sensitive to markets and their expectations for Fed policy. Surprising markets at this stage in the Fed’s cycle is unlikely to go over as a pure reaction to a shift in economic data. The politics are too obvious to be ignored.
But as is the case with most anything Trump says, he is, in this case, a little bit right and a little bit wrong.
The Fed has not “gone crazy,” as suggested by the President. The Fed is, however, raising rates with its inflation mandate essentially at the 2% target and unemployment well below the long-run natural rate.
“Fed Chair Powell is in a tricky spot, but at the very least we do think his job security is assured,” said JP Morgan economist Michael Feroli in a note to clients on Thursday.
Tim Duy, an economist with the University of Oregon and a noted Fed-watcher, wrote Thursday that, “I do not think that this criticism will induce Powell to hike just to prove a point; Powell is going to be the adult in the room. Trump is looking to lay the blame for any slowdown in activity on the Fed.”
But when it comes to actual Fed policy, Duy wrote that, “I am somewhat nervous that even in a low inflation environment the Fed appears fairly resistant to the idea that they should pause at something close to neutral to take a look around and wait for a bit more of the lagged impact of past rate hikes to work their way through the economy.”
In other words, though Duy thinks the Fed has so far kept inflation lower than it otherwise would have been in the absence of rate hikes — thus mitigating the risk of the Fed falling behind the curve — the Fed’s path forecasting another rate hike this year, three more in 2019, and one more in 2020 could run ahead of what the economic cycle is actually calling for.
A situation that could end up making Trump, in the heat of a re-election campaign, a little bit right. Even if it happens to be for the wrong reasons.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland