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The stock market sell-off that continued on Thursday is dragging major U.S. indexes toward bear market territory and underscoring a trend: Economically sensitive sectors are getting hit the hardest, suggesting that stocks are reflecting an anticipated slowdown ahead even as the U.S. Federal Reserve raises interest rates.

The S&P 500 fell 1.6 per cent, marking its sixth decline of 1 per cent or more this month alone. From its record high in September, the index has declined a total of 15.8 per cent – its most severe downturn since 2011 and not far from the 20-per-cent threshold that defines a bear market.

The tech-heavy Nasdaq Composite Index is even closer: It has declined a total of 19.5 per cent from its high point in August. And Canada’s S&P/TSX Composite Index, though no stranger to downturns given its sensitivity to commodity prices, has fallen 14.6 per cent from its recent high.

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The sharp downturns, among the biggest declines since the end of the financial crisis in 2009, come amid a complex time for financial markets and an aging economic cycle that some observers believe is nearing an end.

The Federal Reserve has been raising its key interest rate for the past three years, and raised it again on Wednesday by a quarter of a percentage point, even as some observers – including U.S. President Donald Trump – wonder aloud whether the economy can handle steeper borrowing costs.

“The Fed’s depiction of how robust the economy is doing does seem to fly in the face of the actual data,” said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates. Mr. Rosenberg pointed to slowing economic activity in the third quarter, along with soft capital spending and a weak housing market.

At the same time, there are the complexities of Brexit weighing on stocks and unresolved trade tensions between the United States and China. The U.S. yield curve, or the difference in the yields of short-term and longer-term government bonds, has turned flat as the yield on the 10-year U.S. Treasury bond has fallen, suggesting to some observers that a recession is imminent.

And in the latest development, which unfolded early Thursday, a political showdown over Mr. Trump’s plans to build a border wall with Mexico could lead to a U.S. government shutdown after midnight Friday, which that raises additional uncertainties.

Standard & Poor’s, the credit-rating agency, estimated that a full government shutdown would cost the economy about US$6.5-billion for each week it dragged on. That would cut 0.2 of a percentage point, weekly, from the country’s gross domestic product at a time when GDP growth is already expected to decline in 2019.

“If a shutdown were to take place so far into the fourth quarter, some economic activity would not have time to bounce back. This could worry investors as well as consumers, potentially increasing market volatility on the back of a Fed rate hike and snuffing out some economic activity this quarter," S&P said in a statement.

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During Thursday’s stock market decline, consumer discretionary stocks, energy and technology led the way down, which appears to support the view of an economy that is no longer firing on all cylinders.

“The stock market is recognizing the heightened risk of recession,” said Jeffrey Kleintop, a strategist at Charles Schwab & Co., according to Bloomberg News. “It’s the Fed that really holds the key to the overall market and economic direction in 2019.”

FAANG stocks, an acronym used to describe Facebook, Amazon.com, Apple, Netflix and Alphabet’s Google – technology companies whose share prices have rallied impressively in recent years – are now dragging down stock markets. The NYSE FANG+ Index, which also includes technology heavyweights Baidu, Alibaba Group, Twitter, Tesla and Nvidia, has fallen 28 per cent since June. On Thursday, the index slipped underwater for 2018.

Crude oil fell US$2.29, to US$45.88 a barrel, marking its lowest level in 16 months and notching a 40-per-cent decline since October.

“We expect geopolitics to continue driving oil prices next year, given the highly unpredictable nature of the three men now arguably controlling oil prices on a daily basis (Donald Trump, Mohammed bin Salman and Vladimir Putin), which has thrown market fundamentals for a loop,” Desjardins Securities analysts Justin Bouchard, Kristopher Zack and Chris MacCulloch said in a note.

Energy stocks have been hit hard. In Canada, the sector has fallen 26 per cent since July and is approaching lows seen during the depths of the financial crisis in 2009 and the last energy swoon, in 2016. The sector’s weighing in the S&P/TSX Composite Index is significant, at 17.7 per cent.

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Just as economically sensitive sectors have been leading the way down over the course of the recent market sell-off, traditional havens have been providing some stability.

U.S. utilities, which can usually withstand economic slumps, rose 0.3 per cent on Thursday and are up 14.3 per cent from recent lows in February, when rising bond yields made yield-sensitive stocks look unattractive. In Canada, gold and silver producers were the heroes of the day, lifting the S&P/TSX materials sector by 2.1 per cent, as the price of gold rose 0.9 per cent to US$1,267.90 an ounce.

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