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Who's to Blame for Weakening Markets?

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Bearish sentiment took over the markets Thursday, with the major indexes down around 1.6% to 2% as of 3 p.m. The Dow Jones industrial average was below 23,000, the S&P 500 under 2,500 and the Nasdaq less than 6,550.

Some analysts pointed to the Federal Reserve’s move to raise rates on Wednesday, but other say a looming government shutdown and international factors are at play.

DoubleLine Capital CEO Jeffrey Gundlach said on Twitter that Fed Chair Jay Powell made two mistakes during his press conference: autopilot quantitative tightening and “too much talk about economic ‘modeling.’”

“The stock bear growls on,” Gundlach tweeted late Wednesday.

According to Commonwealth Financial Chief Investment Officer Brad McMillan, the Fed’s message to the markets was “drop dead.”  

“Of course, here I am riffing on the famous headline published after President Ford refused to bail out New York City [in October 1975]. Yesterday, there is no doubt that markets were expecting a bailout from the Fed — and threw a tantrum when they didn’t get it,” McMillan said in a commentary piece early Thursday.

But the Federal Reserve also indicated on Wednesday that it would likely hike rates twice next year — and keep raising them.

“By pretty much ignoring the recent financial market turmoil and focusing on continued economic strength, [Fed Chairman Jerome] Powell put the markets on notice that the Fed will be much less willing to shape monetary policy in order to support asset prices,” McMillan wrote. “With the Fed stepping back, markets will be on their own in a way they have not been for decades.” 

The Fed’s recent tightening may be its “worst … decision ever,” in the words of Thomas Kee, chief economist of Stock Traders Daily. 

“The pace of monetary policy may look tame on the surface as far as rates are concerned, but the pace of the reduction of the Federal Open Market Committee balance sheet makes monetary policy very aggressive, and there are direct correlations between market action and the almost-doubling of the liquidity drain on October 1,” Kee said in a note to investors on Thursday.

“It seems Fed Chairman Powell does not see or is not concerned by that obvious correlation,” he said. “That was either a purposeful oversight, or it reveals a huge hole in Jerome Powell’s ability to anticipate the impact of his monetary policy.”

Geopolitical Whac-A-Mole

According to Michael Arone, chief investment strategist for the US SPDR business of State Street Global Advisors, the markets look like Whac-A-Mole in that “a trio of moles has popped up, leaving investors frustrated and exhausted as they flail away to hammer them down.”

In a market commentary on Thursday, he cited three significant trends: fears of slowing global growth, turmoil in Europe and the U.K. and increasing political discord in Washington.

Recent economic figures from Europe and China have “fueled concerns that slowing global growth at the tail end of 2018 will carry over into next year,” Arone says.

“China reported soft industrial production and retail data, while a key business index in Europe fell to its lowest level in more than four years due to violent antigovernment protests in France and weak manufacturing activity that has Germany struggling to rebound from a third-quarter contraction,” he explained. “Meanwhile, Italy is on the brink of recession.”

And the Brexit crisis looms.

“Prime Minister Theresa May is stuck between a rock and a hard place. Even her own party won’t back the Brexit deal she negotiated with Brussels. And EU officials refuse to modify the terms that were brokered,” Arone said.

Though May survived a recent confidence vote in Parliament, “her inability to pass the deal at home or negotiate new terms in Brussels has left untold risks and much work to be done in a narrowing timeframe,” the CIO points out.

At home, the dangers of divisive politics are increasing.

“This bipartisan bickering is raising larger concerns for investors about whether a divided government can handle more important issues,” explained Arone. “Investors will likely be cautious of this vitriol going forward and that may be reflected in lower asset prices — call it the discord discount.”

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