Stocks Hit Two-Day Skid Erasing Initial Optimism for Yellen Hike

  • S&P 500 falls 3.3% after Fed in biggest drop since Sept. 1
  • Crude oil at 6-year low rekindles anxiety over global growth

On second thought, maybe those zero-percent interest rates weren’t so bad.

After rallying into midweek, the Standard & Poor’s 500 Index reversed course on Thursday and Friday, tumbling 3.3 percent to post the biggest two-day decline ever to follow the start of a Federal Reserve tightening cycle. Gone was optimism the first rate hike in nine years signaled confidence in the economy. Back were concerns that tumbling commodity prices amounted to evidence that global growth is faltering.

“It was an accomplishment that the Fed raised rates, and it shows confidence in the economy, but at the moment pessimism seems to be winning out,” said Richard Sichel, chief investment officer at Philadelphia Trust Co., which oversees $2 billion. “The hike was somewhat old news by the time they did it, and the market was looking for the next catalyst. We’ve had oil prices continuing lower, and that seems to be what’s worrying the market right now.”

Not everyone was convinced the reaction amounts to a verdict on Fed policy or its likely effect on the U.S. economy. Among other things, Friday’s selloff came on a day that often sees higher-than-normal price swings, the quarterly expiration of futures and options on indexes and individual stocks.

Possibly reflecting that, measures of investor anxiety were relatively subdued compared with the size of the selloff in stocks. The Chicago Board Options Exchange Volatility Index increased 9.3 percent Friday after rising 6.1 percent the day before. By comparison, when the S&P 500 slumped 1.9 percent on Dec. 11, the VIX surged 26 percent.

At the same time, the so-called quadruple witching expiration drove trading volume to 12.7 billion shares across American exchanges. That’s 72 percent above the three-month average and the most since the height of the summer selloff on Aug. 24.

“There are a number of things going on in the background of the Fed, a lot of things that are confounding the normal reactions that you would have expected,” said Peter Jankovskis, co-chief investment officer of Lisle, Illinois-based OakBrook Investments LLC. ‘‘It’s a fairly short-term reaction. Eventually within a month or more this will be taken as positive news that the economy is strong enough for a rate hike.”

The S&P 500 fell 0.3 percent in the week, with its biggest two-day slide since Sept. 1 erasing a gain in the final minutes of trading Friday. The gauge began the period with a 3 percent surge over three days, the best such gain in two months. The Dow Jones Industrial Average fell 0.8 percent in the five days. 

Both gauges ended the period at two-month lows, as exuberance over the Fed’s signal that the American economy is ready to walk on its own faded into concern that higher borrowing costs could hamper growth as China’s slowdown shows no signs of abating.

While the market got its long-awaited roadmap from central bankers, the Fed-induced rally evaporated as falling oil prices recaptured investor attention, said Walter “Bucky” Hellwig, who helps manage $17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama. Crude slumped 2.5 percent in the five days to settle at a six-year low. “There are still a lot of things sloshing around in the market,” Hellwig said.

That helped explain a week that saw gains and losses split among the 10 main industries. While utilities stocks rallied 2.7 percent for the biggest gain since July, raw-materials companies slumped for a second straight week, sliding 3.1 percent to a 10-week low. The VIX tumbled 15 percent in the week.

The late-week slump left the S&P 500 lower by 2.6 percent in 2015, and with only eight trading days left, the gauge is on track for its worst year since 2008. That puts even more pressure on the so-called Santa Claus rally to save the year. Historically, the final two-weeks of December deliver a gain of 1.7 percent, though the gauge has fallen 1.9 percent since the middle of the month.

Much of the fate of any end-of-year rally could be hanging on what happens with oil in the days ahead. Crude has dropped 35 percent this year, dragging energy producers lower by 25 percent. In the week, eight of the 10 biggest declines in the S&P 500 came from the energy industry, with Williams Cos. and Pioneer Natural Resources Co. falling at least 13 percent.

“The general belief is that there is going to have to be some level of oil supply constraint to allow the markets to recover,” Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, said by phone. “There’s uncertainty in the market, ranging from policy, to currency movement, to emerging markets, to high yield credit. There are a lot of different things people are looking at.”

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