It was Wall Street that scared the markets as celebrated institutions failed during the financial crisis, and now, when stocks fall into bearish territory, it is Washington who is taking the blame.
The interest rate policy of the Federal Reserve (Fed) has been heavily criticized for shaking the markets. In a tweet on Christmas Eve, President Donald Trump said the Fed is "the only problem" the economy is facing. But strategists say the president has also become a source of volatility, and its positive impact on stocks has already become mostly negative.
The Trump administration over the weekend denied reports that the president wanted to oust Fed Chairman Jerome Powell. Even so, his long criticism of the Fed president has created market anxiety, and it is also one of the many reasons why Trump has also become a factor of uncertainty.
"He does not like Powell to raise rates and he does not like Trump threatening to remove Powell by raising rates," said Chris. "Nothing makes the market happy at this happier time of year." Rupkey, chief financial economist at MUFG.
Monday's shares fell sharply in a half-day session, with the S & P 500 now joining the Nasdaq in a bear market – a 20% or more decline based on its intraday high. The S & P index fell 2.7 percent to 2,351 in the worst performance on all-time Christmas Eve. In the month, the S & P index fell 14.8% in its worst month of December.
Strategists point to Trump's actions in recent weeks, including his trade policy and comments about being a "fare man" after meeting with Chinese President Xi Jinping. They also point to their bravado and willingness to close the government on the border wall in a meeting with the Democrats. Several days later, it looked like he would agree to a deal, so he seemed to make a turnaround, leading to the standstill Friday night.
"We do not have a recession forecast next year, but we will do this if the stock market does not recover from these extreme lows. This stock market is doing exactly what it should do before a recession and it will be a miracle if the economy avoid one because nobody in Washington has an idea of what to do to calm the markets and make the country's economic future go well, "Rupkey noted.
Trump's sudden decision to withdraw the military from Syria further frightened markets, particularly as it led to the resignation of Secretary of Defense James Mattis, one of the most respected members of the government.
"Trump seems to be getting more and more unstable – that's one factor, not the only factor," said Greg Valliere, global market strategist at Horizon Investments. "The markets need to see some stability and predictability, and they do not see anything like it."
Treasury Secretary Steven Mnuchin, in an apparent effort to reassure markets on Sunday, may have prompted even more uncertainty when the Treasury issued a statement after its ties with key chief banking officers. Mnuchin said growth remains strong and that there is a robust activity of consumers and companies. But the statement went on to say that there was "ample liquidity" available for loans to consumers and businesses.
"We are in the US enjoying a record availability of financial liquidity, and that is still the case." Mnuchin's maneuver can not be considered as pragmatic or political. "There is no reason for this," said Kim Wallace, policy strategist at Eurasia Group . He said the Fed may be tightening financial conditions with rate hikes, but markets are months away from seeing too much impact.
"As of Friday, we asked the Treasury secretary to raise questions about financial stability, reports from the president asking if he could dismiss the Fed chairman and a government shutdown," wrote Cowen's political strategists. "Our deep concern is that Team Trump can unleash the very crisis he wants to avoid."
Strategists see little chance of a short-term change that can soothe volatility.
"The first place would be that Democrats and Republicans, at least, are talking about how they will end the standstill, and perhaps the dawn will come from a different horizon … meaning they do not expect any kind of illumination from Washington," said Stovall, adding that it may be a corporate event as the earnings season approaches.
Wallace said there could be a change in sentiment if both Republicans and Democrats look beyond how their actions affect their base before the 2020 election, and put the US first.
"Why in the world would you, if you were the president of the United States, why would you actively meet with a very narrow slice of the 535 members of Congress to conclude that the closure of government for any reason is a good policy over Christmas? season?" said Wallace. "This shows a complete lack of understanding of the administration of government.
"Markets will find out what the fundamentals mean in real time and in the future. What they rarely anticipate is that politics actively on a discretionary, unprovoked basis raises the wall of concern."
Valliere said that if Trump were able to show some real progress with China in trade, it could help stabilize the markets.
"If he's so attached to stock market performance, if he's so worried, he's got to show the markets more stability … He's part of the problem," Valliere said.