Friday was a day of extreme tumult in the financial markets, with S&P 500 futures sinking 0.9% foreshadowing an even greater risk-off sell-off across risk-assets. The benchmark index has shed about $1.3 trillion in market capitalization in the past two weeks. This drop reduces it from the record high reached in late October. The central bank’s rate cuts in September and October first rallied the stock market. Unfortunately, this recent drop is cause for grave concern as it signals the possible end to those hard-fought improvements.
Investors are still figuring out what a pause means with respect to the timing of any rate cuts. Such a fogginess would further muddy the near term for equities that have flourished on borrow-cheaper-better expectations. The Nasdaq 100 futures plunged 1.4%, while the Dow futures were off 283 points, or 0.6%. The broader market sentiment has quickly turned bearish as well, with the Crypto Fear and Greed index registering “extreme fear” in the crypto traders’ psyche.
Impact of Central Bank Policies
The last round of volatility jump around in stock values fairly well matches a 500 point rise and drop issued by the federal reserve. Up until September and October, the run-up in interest rates had actually been a net positive for equities, returning investors’ confidence. Futures traders are now pricing a 53% chance that the central bank will cut rates by December. This leads to considerable uncertainty about what the future holds for the conduct of monetary policy.
Ed Yardeni, president of Yardeni Research, reflected on the shift in market sentiment:
“When the government was shut down, we could believe whatever we wanted to believe. Now we need to be data dependent, and that may not be as much fun.”
His remarks highlight just how important such economic data has gotten for driving smart, strategic investments. Traders have begun to re-price the market as the monetary policy pivot takes shape.
Sector-Specific Pressures
The tech sector has been especially bruised over the past few weeks. The Nasdaq Composite, amidst a broader market downturn, has fallen more than 3.5% this month. It’s on track for its first down month since March. Fears about rising debt issuance and growing capital expenditures have further fueled selling pressure in this sector.
Keith Lerner, chief market strategist at Truist, noted that investors are increasingly skeptical about the profitability of tech investments:
“Investors are questioning whether these investments will translate into future profitability.”
Skepticism has deepened as companies proclaim huge supply agreements with OpenAI. John Belton, portfolio manager with Gabelli Funds, points out that with the statements made in these announcements, they have created questions about their financial goals.
Broader Market Trends
Along with the obvious decline of most major indices, Bitcoin saw its fair share of interesting movement. On Friday, Bitcoin was down 5%, in line with all cryptocurrencies and settling about $95,000. The drop represents nearly a 25% drop since the cryptocurrency reached a record high on October 6th. This sharp drop is symbolic of all-around confusion as investors readjust their positions in a range of asset classes.
Compared to this time last month, the benchmark S&P 500 is down more than 1.5%. With all this, market participants are worried that there is more to come. Ed Yardeni characterized the current pullback as somewhat overdue but not indicative of an impending correction:
“This (pullback) is somewhat overdue, and I don’t think it’s the start of a correction.”
Market participants are sailing in choppy seas. They are wondering what role policy changes and new economic indicators will play in shaping their investment strategies moving forward.