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Monday, October 25, 2021

Dow Drops 500 on Worries Over China, Washington Gridlock and the Fed

The Dow Jones Industrial Average shed more than 500 points in early trading Monday before recovering some, as Wall Street worried about China, a political standoff in Washington over the debt ceiling and a critical meeting this week of the Federal Reserve’s monetary policy committee.

September is historically the cruelest month for the market. According to Barrons, the average September return for the S&P 500 dating back to 1928 has been a loss of 0.99%. Losses tend to accumulate in the latter part of the month. The selloff is on pace to be the worst since July.

The Dow opened down more than 500 points and was still off by that much in the second hour of trading.

The markets face a wall of worry this week, with a two-day meeting of the Federal Reserve Board on tap starting Tuesday. The central bank will issue updated economic projections and Fed Chairman Jerome Powell will hold a press conference Wednesday afternoon.

The Fed has indicated it is moving closer to “tapering” or winding down its $120-billion-per-month purchases of Treasuries and mortgage-backed securities, which have buoyed markets and boosted stocks by keeping interest rates low. Most analysts expect the Fed to announce its plans no sooner than its November meeting although its statement will be parsed for any further insight.

“The Fed has repeatedly emphasized two things – they want to see substantial further improvement in the labor market and they expect inflation to be transitory,” Bankrate Chief Financial Analyst Greg McBride said in a statement Monday. “Job growth disappointed in August and the inflation data has plenty to support their ‘transitory’ thesis, so any announcement about tapering bond purchases will wait until November, with a likely December start.”

Other issues preying on the markets are the standoff in Washington over raising the debt ceiling, with Senate Minority Leader Mitch McConnell saying last week that Senate Republicans will not vote to increase the Treasury’s borrowing authority which expires on September 30. That raises the specter of a default on the country’s debt.

GOP lawmakers say they are doing this out of concern about President Joe Biden’s $3-trillion-plus spending proposals. But the move is purely political, as the debt reflects programs already funded and the national debt increased $7 trillion during the past few years of GOP control of the White House and Senate.

The standoff over the debt ceiling comes as Biden is struggling with members of his own party, both on the left and among more moderate members, over his spending proposals and an infrastructure package.

Meanwhile, the resurgence of coronavirus, especially cases of the highly transmissible delta variant, is having a direct impact on the economy. The August employment report from the Commerce Department was disappointing, with a paltry 235,000 jobs added. Many large employers have delayed reopening their offices and other facilities from October to January, while many locales, schools and other institutions have brought back masking requirements.

“Officials are likely to revise GDP growth lower for this year, though maintain above-trend growth projections through 2024,” Wells Fargo Managing Director and Chief Economist Sam Bullard wrote Sunday. “Officials’ inflation projections are likely to remain modestly above desired targets through 2024 and unemployment rates modestly below, consistent with the committee’s interpretation of average inflation targeting.”

News out of China about that country’s troubled property market also rattled markets, with the benchmark Hang Seng index plunging 4%, according to CNBC.China’s crackdown on some of its leading technology companies also has rattled investors.

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