Stock market sell-off continues as U.S. government shutdown looms

Stock prices plunged again on Thursday as a series of big drops in December kept stocks on track for their worst month in a decade. The Dow Jones Industrial Average dropped 464 points, or just under two per cent, 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, placing the index into official bear market territory.

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.

If it finishes the year at its current level, the Dow Jones will also post its worst year since 2008.

The Toronto Stock Exchange lost almost one per cent to close at 14,138. Canada's benchmark index has lost about 15 per cent of its value since July. Oil is a big factor in the TSX's woes as the price of West Texas Intermediate continues to languish, down $2 a barrel on Thursday to $46.15.

The weakness in oil briefly pushed the Canadian dollar below the 74 cent mark on Thursday, a level the loonie hasn't breached since early 2017.

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.

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.

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.

Shutdown looming

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.

Long term bond yields have dipped below short-term ones, something call it an "inverted yield curve" which is 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.

"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.