Dow Drops Another 500 Points, Extending Worst December Start in Nearly 4 Decades

U.S. stocks finished sharply lower Monday in a volatile session that saw the S&P 500 and Nasdaq post fresh year-to-date closing lows, extending the worst start to a December since 1980.

How did the benchmarks trade?

The Dow Jones Industrial Average retreated 507.53 points, or 2.1%, at 23,592.98, the S&P 500 fell 54.01 points, or 2.1%, at 2,545.94, and the Nasdaq Composite Index retreated 156.93 points to 6,753.73, a drop of 2.3%.

The S&P 500 closed at its lowest level since October of 2017, the Nasdaq finished at its lowest since November of 2017, while the Dow closed at lowest level since March 23, according to Dow Jones Market Data.

What drove the market?

With just a handful of trading sessions left in 2018, investors remained unhinged by the major macro headwinds that have buffeted markets in recent months: rising interest rates, slowing global growth and U.S.-China trade tensions.

Of particular interest is the Federal Reserve, which will conclude its final policy meeting of 2018 on Wednesday. Although the market is widely expecting a rate increase of a quarter of a percentage point, more influential investors from Stanley Druckenmiller to Jeffrey Gundlach have called on the Fed to take a wait-and-see approach and decline to hike rates this week.

This reflects the bearish sentiment that has consumed investors in recent weeks and which helped fuel Monday’s selloff. As recently as September, the central bank was projecting a rate increase this week, plus three more in 2019.

Since that time, evidence of slowing global growth, a rising dollar and slower inflation has helped encourage Fed officials to become more dovish in their public statements, while fed funds futures markets show investors predict only one or no rate increases next year.

These same factors, plus fears that the Fed won’t respond dovishly enough, are causing anxiety on Wall Street, as the bulls and bears debate whether the current pullback is another in a series of corrections that have dotted the nearly 10-year-old bull market, or the beginning of a lasting bear market.

On Friday, evidence of the effects of rising U.S.-China trade tensions, and of a broader slowing of the Chinese economy, cropped up as China released data that showed both industrial output and retail sales for November missed economists’ forecasts.

A slowing Chinese economy underscores the importance of continuing U.S.-China trade negotiations, and leaders of both nations have been eager to promote optimism that a deal will be reached before the Trump administration’s March 1 deadline, when it said it would raise tariffs on Chinese imports further.

Traders are therefore also looking forward to speech by President Xi Jinping, to be delivered Tuesday morning in Beijing on the topic of economic reform, for any hints as to the trajectory of trade negotiations.

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