December 20, 2018 / 1:57 PM / 8 months ago

RPT-After Fed selloff, is a U.S. bear market next?

 (Repeats Dec 19 item with no changes to text)
    By Lewis Krauskopf
    NEW YORK, Dec 19 (Reuters) - Did Jerome Powell just poke the
bear?
    U.S. stocks took another body blow on Wednesday after the
Federal Reserve raised interest rates again and the central bank
chairman did not soften his tone about the outlook for further
financial tightening to the degree investors had hoped.
    Now the question is whether Powell's message that the U.S.
economy should be strong enough to stand on its own without
further assistance from the Fed will be the catalyst that
tumbles stocks to bear market levels.
    "It takes away the idea that the Fed is a friend at this
point," said Bucky Hellwig, senior vice president at BB&T Wealth
Management in Birmingham, Alabama.
    "It has the potential (to push us into a bear market)
especially if Powell and the other members of the FOMC continue
to sound hawkish between now and the next meeting." 
    When the dust cleared on Wednesday, the S&P 500 was
down 1.54 percent on the day, which put it 14.5 percent below
its Sept. 20 record high. That moves the benchmark index ever
closer to the 20 percent decline many market observers consider
to be a bear market.
    The Nasdaq was even closer to growling. The index
known for its high profile tech names ended down 18.2 percent
from its Aug. 29 high, with a 2.17 percent selloff on the day.
    In fact, well over half of S&P 500 companies are now down by
at least 20 percent from their 52-week highs, while some
segments of the market including small-cap stocks have already
confirmed a bear move.
    In its decision on Wednesday, the Fed raised benchmark
overnight lending rates by 0.25 percent to a range of 2.25 to
2.50 percent. It is keeping the core of its plan to tighten
monetary policy intact even as central bank officials said they
would likely slow the pace of further rate increases next year.

    The market's selloff steepened during Powell's press
conference as he said the central bank would continue drawing
down the size of its balance sheet by $50 billion each month,
even though it was a repetition of longstanding Fed policy.
    "The balance sheet question did him in," said Fritz Folts,
chief investment strategist at 3EDGE Asset Management in Boston.
"Maybe they have already committed their policy error."
    Powell jostled the stock market in recent months with his
comments about the level of interest rates. Late last month, the
Fed chair injected investors with a strong dose of optimism,
saying that the central bank's policy rate was "just below"
estimates of a level that neither brakes nor boosts a healthy
U.S. economy.
    "It was going to be really hard for him to not spook the
market after it overreacted last time he talked," said Megan
Greene, global chief economist with Manulife Asset Management in
Boston. "Rate hike expectations had fallen to one for 2019 which
wasn't realistic."
    To be sure, there is no guarantee the S&P 500 will slide
into bear market territory. For one, investors are quick to note
that bear markets are linked to recessions and the economy looks
relatively solid.
    Also, the first reaction of investors to Powell and the Fed
may not be their last.
    “If you were to look historically, the market’s initial knee
jerk reaction tends to be the wrong one,” said Jamie Cox,
managing partner with Harris Financial Group in Richmond,
Virginia.
    But for now the Fed has added to jitters for a market
already spooked by declining U.S. corporate profit growth and
trade tensions between the two largest economies, the United
States and China.
 INDEX         % DROP      LOWEST
               FROM HIGH   CLOSE SINCE
 MSCI          24.0        Dec. 18,
 Emerging                  2018
 Market                    
                           
 S&P 600       23.5        Sept. 8,
                           2017
 Russell 2000  22.5        April 13,
                           2017
 Dow           20.9        Aug. 25,
 transports                2017
                           
 S&P 400       18.8        Dec. 30,
                           2016
 Nasdaq        18.2        Oct. 26,
 Composite                 2017
                           
 MSCI World    16.8        May 18,
 <.MIWD00000P              2017
 US>                       
 S&P 500       14.5        Sept. 26,
                           2017
 Dow           13.1        Nov. 15,
 industrials               2017
                           
 Source: Refinitiv




 (Additional reporting by Caroline Valetkevitch, Rodrigo Campos,
Sinead Carew, Chuck Mikolajczak and Trevor Hunnicutt in New
York, Amy Caren Daniel in Bengaluru; Editing by Cynthia
Osterman)
  
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