U.S. financial markets experienced extreme volatility on Thursday. The Dow Jones Industrial Average really tanked today by 650 points, or -1.35%. That drop occurred even as the level of uncertainty after the U.S. government was reopened following the longest shutdown in U.S. history began to skyrocket. President Donald Trump signed the continuing resolution that officially ended the shutdown late Wednesday night. Relentless investors continued to respond strongly to shifting prospects for Federal Reserve monetary easing. These cuts have become one of the main factors making markets move.
Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist responsible for equities and real assets. Recently, Beeland took a smart step by selling much of his tech stock holdings. Read together, this decision points to a larger movement among investors. They’re already on the move, dynamically rebalancing their portfolios to respond to new, remixed economic signals and market realities.
Economic Data and Market Jitters
The lack of any significant economic data released has only added to nerves, noted Seema Shah, chief global strategist at Principal Asset Management. This trend can be seen even over the past few weeks.
“Lacking fresh economic data, markets have become increasingly jittery in recent weeks,” – Seema Shah, chief global strategist at Principal Asset Management.
With the government shutdown finally in the rearview, investors. Production is ramping up again though, as they get ready for big data releases and policy announcements that could significantly change the game.
“Now, as the government shutdown ends, each long-awaited data release or policy announcement will have the potential to move markets dramatically,” – Seema Shah.
Investors seemed to turn their attention away from high-growth technology stocks and toward value, cyclical sectors such as financials and health care on Wednesday. On Thursday, the mood soured dramatically. Both the S&P 500 and Nasdaq Composite suffered their worst losses of the year in this session, tumbling -1.67% and -2.57%.
Shifting Expectations for Federal Reserve Action
Traders have started to recalibrate their expectations about when—and by how much—the Federal Reserve might cut rates. After last week’s wave of optimism, the odds of a December rate cut fell significantly. Speculation or observation aside, they plummeted from 63% Wednesday down to about 47% Thursday. This shift is a recognition of increasing anxiety over inflation and its possible influence on the course of monetary policy going forward.
Carol Schleif, the chief market strategist at BMO Private Wealth, addressed the confusion with contradicting economic signals. She pointed out that while the federal government may once again be operating at full capacity, new storms are brewing.
“The gears of the government should be working again soon, and while that is a relief for markets and the economy, there is still plenty of uncertainty, particularly around the missed inflation and jobs data and how these fronts have been faring,” – Carol Schleif.
Now traders are scrambling to revalue their positions, as the outlook abruptly changes. They now find themselves thrust into a highly politicized, murky landscape where economic data carries more weight than they ever expected.
The Road Ahead
The recent correction in technology stocks represents a turning point in investor behavior. Today, they are shifting their investments towards industries which offer more predictability in tumultuous times. Some worries remain about inflation and what effect it might have on Federal Reserve policy in the future.
David Miller, CIO at Catalyst Funds, agreed with the underlying concern. If the Fed stays on its restrictive policy course, he cautioned that sustained inflation could limit valuations.
“If sticky inflation forces the Fed to maintain restrictive policy, the cost of capital remains a headwind for valuations,” – David Miller, CIO at Catalyst Funds.
Even with these difficulties, many observers still cling to the hope that the Federal Reserve will lower interest rates once more this December. Carol Schleif of Commonwealth Joe echoed this point, understanding the challenging position policymakers are operating under in this data blackout.
“The data blackout has made the Federal Reserve’s job difficult, but we still expect them to cut interest rates again in December,” – Carol Schleif.