The Fed, not trade, could bring another correction to the Dow and S&P 500, market watcher says

Investors may be obsessing over Trump trade policies, but another government body could really be driving the sell-off: the Fed.

Since the Fed raised rates on June 13 for only the seventh time since the financial crisis, the Dow has fallen by more than 1,000 points, while the S&P 500 has dropped 2 percent. The Fed sell-off is just beginning, says Chad Morganlander, portfolio manager at Washington Crossing Advisors.

“We think there’s going to be additional volatility, and you could certainly see a downside of 5 to 10 percent,” Morganlander told CNBC’s “Trading Nation” on Monday.

A 10 percent drop would mark a nearly 15 percent decline from the S&P 500’s record high set in late January, putting it firmly into a correction and near bear market territory. A decline of more than 10 percent drop from 52-week highs marks a correction.

If the Dow were to drop 10 percent, it would push the index below 22,000 and put it nearly 18 percent below its 52-week high.

The Fed is showing no signs of slowing down, says Morganlander.

“We believe that they’ll raise rates two more times in 2018 and an additional, perhaps, one or two times in 2019,” he said. “Keep in mind liquidity also is being drained from the system. The Fed’s reducing their balance sheet and ECB has signaled that they also want to readjust.”

The Fed is more than likely to raise its federal funds rate by another 25 basis points at its late September meeting, according to CME Group fed funds futures. The chances of a fourth rate hike in December sits at 46 percent.

The technical indicators are also pointing to further downside for the stock market, according to Craig Johnson, chief market technician at Piper Jaffray.

“We are now starting to break below our 200-day moving average in the Dow, not a great sign,” Johnson said on Monday’s “Trading Nation.”

The S&P 500’s technicals look slightly better to Johnson, but not by much.

The index “has been doing nothing except for consolidating sideways for the entire year,” said Johnson. “We continue to think there’s going to be headwinds emerging in the second half here and we’re going to continue to see this market likely go nowhere.”

Johnson is looking for 2,850 on the S&P 500 by year-end. That target represents a 4.5 percent advance from current levels.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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