Slumping Stock Market Enters Negative Territory for the Year

Another wave of selling hit the nearly decadelong bull market as investors worried that the ideal climate they have long enjoyed — a surging economy, low interest rates, and fast-growing corporate profits — would soon be behind them.

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Matt Phillips
, New York Times

Another wave of selling hit the nearly decadelong bull market as investors worried that the ideal climate they have long enjoyed — a surging economy, low interest rates, and fast-growing corporate profits — would soon be behind them.

The benchmark S&P 500 shed 3 percent on Wednesday, wiping out its gains for the year. The tech-heavy Nasdaq composite index was down 4.4 percent, and has fallen more than 12 percent since early September.

Just over a month ago, the S&P 500 was up nearly 10 percent for 2018, with expectations that coming quarterly corporate earnings reports — juiced by a generous tax cut and strong economic growth — would keep sending stock prices upward.

It hasn’t worked out that way.

Instead of celebrating quarterly profit and sales numbers that have largely lived up to expectations, investors have zeroed in on potential risks to the economic and corporate profit outlook for the coming year. Rising commodity costs tied to tariffs on imports, expectations that the Federal Reserve will keep raising interest rates, and an economic slowdown in China could all start to bite. And that’s on top of investors’ anxiety about what the midterm elections could mean for their portfolios.

“It was kind of a market that was looking for a reason to have some money come out of it,” said Tony Dwyer, chief market strategist with brokerage firm Canaccord Genuity in New York. “And it found it.”

The Dow Jones industrial average fell 608 points, or 2.4 percent, on Wednesday. And the Nasdaq has now fallen into correction territory — a decline of more than 10 percent from an earlier peak, which indicates a drop that’s more serious than a garden-variety slump. The S&P is down to 2,656.10, more than 9 percent off its recent peak on Sept. 20, meaning it, too, is nearing a correction.

The sell-off has come as political discord has jumped with Election Day less than two weeks away. On Wednesday, the discovery of explosive packages sent to prominent Democrats, including former President Barack Obama and Hillary Clinton, the former secretary of state, as well as CNN, added to an already tense environment.

Some market observers think that investors may be moving to the sidelines before what could be a very close and bitter election.

“I think people just want to clear the decks and get the heck out before the midterm elections frankly,” said Chris Rupkey, chief financial economist at MUFG Union Bank.

President Donald Trump has repeatedly cited the strong performance of the stock market as evidence of the success of his administration’s business-friendly approach. And as the market has slid lately, he has ratcheted up his criticism of the Federal Reserve’s plan to raise interest rates as economic growth remains strong.

Low interest rates have helped support economic growth and the stock market since the financial crisis 10 years ago. But with unemployment at a 49-year-low, the Fed is raising interest rates, saying it wants to keep the economy from overheating, which could set off inflation. The Fed is expected to raise interest rates again at its next meeting in December.

The rise in interest rates has been particularly painful for some pockets of the markets. Shares of homebuilders are down more than 16 percent this month, as rising mortgage rates have made houses less affordable. Smaller companies — which are heavily exposed to floating rate debt — have also been hurt by rising rates, which increases the cost of their debt payments. The Russell 2000 index of small-capitalization stocks has fallen more than 13 percent in October.

And the president’s trade war with China has increasingly preoccupied the markets, analysts said. Official numbers released by Beijing last week showed China’s economic growth has slowed to 6.5 percent, its lowest level since 2009.

The slowdown in China, the world’s second-largest economy, could mean falling sales for American companies that export to that market. As large consumers of metal who have invested heavily to gain access to the Chinese auto market — the world’s largest — carmakers are particularly vulnerable to such risks. On Wednesday, Ford cited weak sales in China for falling profits. Company officials said issues surrounding trade disputes, including tariffs on imported steel and aluminum, could cost Ford $1 billion.

“What is really happening here is that people are saying, ‘We just don’t know about trade. We don’t know how that’s going to hit the margins or the earnings streams next year,'” said Michael Purves, chief global strategist at the brokerage firm Weeden & Co.

Purves said investors were eager for a resolution to the trade dispute and nervous that it could escalate further.

“I think there is a game of chicken going on between Trump and the markets right now,” he added. On Wednesday, the market tumble snowballed over the course of the day. Technology companies that have driven big market gains were badly battered. Shares in the tech heavyweights Amazon, Microsoft and Facebook all fell more than 5 percent. Netflix fell more than 9 percent after a media report that Apple planned to announce a subscription television service that would go head-to-head with its streaming service.

The news wasn’t all bad for tech. Later Wednesday, Microsoft reported results that exceeded analyst expectations, sending its shares higher in after-hours trading. And Tesla shares also rose in after-hours trading after the electric-car maker reported its first profit in two years.

More high profile results from tech companies are due in the coming days. Google’s parent company Alphabet, Amazon and Twitter are scheduled to report results Thursday. And Facebook’s earnings report Tuesday will be of intense interest: The company’s report last quarter sent its stock price diving, erasing more than $100 billion in shareholder wealth.

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