U.S. stocks gained Friday after Federal Reserve Bank of New York President John Williams said that the central bank could reassess its interest rate policy and balance sheet reduction in the new year if the economy slows.
Williams also said the Fed was listening to the market, and could re-evaluate its outlook for two rate hikes next year.
“We are listening, there are risks to that outlook that maybe the economy will slow further,” Williams told Steve Liesman on CNBC’s “Squawk on the Street” Friday.
“What we’re going to be doing going into next year is re-assessing our views on the economy, listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views,” he said.
The Dow Jones Industrial Average gained more than 350 points following Williams’s comments and as athletic apparel company Nike rallied more than 9 percent following strong earnings results.The S&P 500 added 1.4 percent and the tech-heavy Nasdaq Composite added 0.8 percent.
However, stocks are on track for steep losses for the trading week and the month of December.
- The Dow and Nasdaq on Thursday posted their lowest closes since October 2017, while the S&P 500 finished at its lowest level since September 2017. The Nasdaq briefly entered a bear market before recovering.
- The Dow and S&P 500 have each lost more than 3.5 percent this week; the Dow has shed more than 800 points since Monday.
- The Dow and S&P 500, which are both in corrections, are on track for their worst December performance since the Great Depression in 1931, down more than 9 percent each this month.
- The Dow is on track for its worst month since February 2009.
- Both the Dow and the S&P 500 are now in the red for 2018 by at least 6 percent.
On Thursday, the Dow Jones Industrial Average dropped 464.06 points to close at 22,859.6, bringing its two-day declines — which encompassed the market’s reaction to the Fed’s rate hike — to more than 800 points. The S&P 500 shed 1.58 percent to end Thursday at 2,467.41 while the Nasdaq Composite fell 1.6 percent and closed at 6,528.41. The Cboe Volatility Index — one of Wall Street’s best gauges of marketplace fear — rose above 30 on Thursday, its highest level since February.
“I think the one thing about Powell on Wednesday was the statement was not the dovish hike people were hoping for,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “But on the other hand Powell still talked about data dependency and did say if the data does not perform the fed won’t raise again.. I think that’s what Williams will emphasize.”
Government shutdown concerns
Sentiment was dampened Friday after President Donald Trump aggravated fears of a government shutdown after tweeting:
“The Democrats, whose votes we need in the Senate, will probably vote against Border Security and the Wall even though they know it is DESPERATELY NEEDED. If the Dems vote no, there will be a shutdown that will last for a very long time. People don’t want Open Borders and Crime!”
Equities fell to their lows of the day in the previous session after U.S. House of Representatives Speaker Paul Ryan announced that PresidentTrump would not sign a temporary government funding resolution without funding for a U.S.-Mexico border wall.
Later on Thursday, the House passed a temporary spending bill with more than $5 billion for Trump’s border wall — an inclusion which will likely impede its ability to clear the Senate. The Senate had unanimously approved a bill Wednesday night to keep the government running through Feb. 8 — without border wall money.
“Although shutdowns get a lot of media hype, the reality is that stocks tend to take them in stride. In fact, the S&P 500 has gained during each of the five previous shutdowns,” explained LPL Senior Market Strategist Ryan Detrick.
Both House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer have flatly said congressional Democrats will not approve wall money. As Republicans need Democratic votes to pass spending legislation in the Senate, a partial shutdown is all but assured if the GOP insists on funding for the barrier.
Fed rate hike
The Fed’s decision to raise the benchmark overnight lending rate by one quarter point on Wednesday triggered a new wave of selling across Wall Street earlier in the week. That move was widely expected by markets but investors appeared to be taken off guard by Fed Chairman Jerome Powell’s comments that the central bank was satisfied with its current path to reduce the balance sheet with no plans to change it.
The Fed currently is allowing $50 billion a month to run off its massive debt balance sheet as its securities mature, tightening financial conditions. The balance sheet is mostly a collection of bonds the central bank purchased to vitalize the economy during and after the financial crisis.
Amid concerns over a government shutdown days before Christmas, the White House was thrown into further political turmoil after Defense Secretary James Mattis resigned from his position on Thursday over disagreements with Trump.
Mattis, who is due to step down at the end of February 2019, said in a letter addressed to Trump that “you have a right to have a Secretary of Defense whose views are better aligned with yours” on a number of subjects.
“I believe it is right for me to step down from my position,” he said.