Dow craters 369 as slowdown reality sets in

U.S. stocks cratered in their worst day in months as investors are starting to realize global growth is likely to slow down.

The market's change-of-heart became clear Friday when the Dow Jones industrial average ended down 367 points, or 2.1%, to 17,128.45 and the Standard & Poor's 500 slid 36 points, or 1.8%, to 2005.52. Falling a little less harder was the Nasdaq composite losing 79 points, or 1.6%, to 4923.08. It was the Dow's worst one-day percentage drop since falling 2.8% on Sept. 1, 2015.

Investors' initial celebration over the Federal Reserve hike in short-term interest rates Wednesday turned into a sinking realization of what the move could mean for macroeconomic growth. The market initially rallied 224 points Wednesday on relief from the Fed finally having enough faith in the economy to push short-term rates up from nearly 0%. But then reality set in. The Dow lost 620 points Thursday and Friday.

The market's about-face shows investors' initial relief in the Fed's decision to take interest rates higher is being replaced with concern of how that will affect companies and consumers. The market is now down 2.3% since the Fed made its move, where short-term interest rates were taken up for the first time in nearly a decade.

"It is now apparent that the immediate post-FOMC (Fed) rally was a head-fake of enormous proportions," says David Rosenberg, chief economist at Gluskin Sheff.

That's why the price of oil is becoming so important. Investors are looking at oil prices as a barometer to show how hot global economic activity is. Oil on the U.S. market is down 0.2% a little below the $35-per-barrel mark.

All told, the market's decline following the Fed's move is simply following the playbook where investors take stock prices down initially after a rate hike. The S&P 500 has declined by 7% on average following the first rate hike, says Credit Suisse. The first rate hike rarely signals a market top, Credit Suisse says.

Nervousness was already showing up in investor behavior. Investors took $39.6 billion out of mutual funds in the week ended Dec. 16, says Lipper. Showing how investors are hunkering down and preparing for volatility, investors added $0.3 billion to relatively safe municipal bond funds during the week, but pulled $13.2 billion and $15.4 billion, respectively, from stock and bond funds.

"During the run-up people were fast to go long (and buy stocks)," says Michael Farr of Farr Miller & Washington. "People are now desperate to get flat (and reduce their exposure to stocks)."

The volatility is typical for the end of the year, Farr says, especially coming off the expiration of financial instruments called options and following a big move by the Fed. "Investors expect volatility at the end of the year," Farr says. "If this goes on another three or four days, I might change my tune real fast."

In Asia, Tokyo's Nikkei index skidded 1.9%.

The DAX of Germany was off 1.2%, while Britain's FTSE fell 0.8%.

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