It was a bloodbath on Wall Street Thursday as stocks took a severe beating, dashing any hopes of sustaining this week’s feeble rally. The Dow Jones industrials plunged 517 points or a gut-wrenching 1.3%, erasing its earlier gains in dramatic fashion. The S&P 500 got clobbered too, surrendering 1.1% by the closing bell. But it was the Nasdaq that really got taken to the woodshed, with the tech-heavy index tumbling 1.1% in a merciless selloff.
The harrowing selloff kicked into overdrive in the final, frenzied hours of trading, turbo-charged by a stunning surge in oil prices that set off deafening alarm bells about inflation potentially roaring back with a vengeance. Crude went vertical, with West Texas Intermediate futures skyrocketing over $86 a barrel – the highest crude has struck since last October’s spike unleashed shockwaves through the economy.
Investors scrambling for cover were also blindsided by belligerent comments from Neel Kashkari, the Minneapolis Fed president. Kashkari lobbed a hand grenade into the markets by musing whether the Fed should pump the brakes on cutting interest rates if inflationary pressures refuse to back down.
Kashkari’s freighted rhetoric piled on to the growing chorus of hawkish Fed-speak that has rained on the parade of those praying for aggressive rate cuts this year to resuscitate the sputtering economy. No wonder investors are hunkered down in a defensive crouch.
“They’re in a wait-and-see holding pattern right now,” said Sam Stovall, chief investment strategist at CFRA Research, surveying the smoldering wreckage. “With the 10-year Treasury yield blasting higher on Kashkari’s inflation saber-rattling, the concerns are amplifying that the Fed may be in no rush to ease off the monetary brakes.”
The 10-year yield had sunk earlier, but Kashkari’s ominous comments detonated a fresh surge that saw it finish around 4.33% – perilously close to Wednesday’s new high for the year just above 4.43%. Yields rising rapidly can exert intense downward pressure on stock prices, especially in the high-growth, rate-sensitive tech arena.
Trillion-dollar tech titans like Nvidia and Google parent Alphabet looked like they’d finally catch a break, rallying strongly out of the gate Thursday. But the runaway train of selling overwhelmed them too in brutal fashion as the rout deepened. The info tech sector of the S&P 500 plummeted a dizzying 1.5%.
With the S&P 500 still trading at a nosebleed 33% premium to its long-term average valuation, Stovall warned: “At these obscenely rich levels, it’s only a matter of time before we see more equity indigestion as investors puke up some of these hard-to-swallow gains.”
No doubt, the crosscurrents whipsawing investors are growing fiercer by the day. On one hand, the labor market remains a boking powerhouse, with the jobless rate still hovering near 50-year lows. Consumer spending keeps defying gravity too, acting as an economic bulwark despite borrowing costs surging.
But elevated inflation stubbornly lingers, an excruciating migraine for the Fed as it tries to strangle rising prices without going too far and inducing a full-blown recession. Meanwhile, manufacturing activity has gone into a tailspin, flashing bright red warning signals that the cumulative impact of the central bank’s most aggressive credit tightening campaign since the 1980s is rapidly throttling the economy.
Just for good measure, the regional banking sector has been buckling under systemic strains that have sparked a crisis of confidence in the financial system. The daunting prospect of a credit crunch that could exacerbate a potential downturn is rattling investors.
Which brings us to Friday’s titanic monthly jobs report from the Labor Department. With so much conflicting economic noise, traders are desperately parsing every new data morsel for clues on whether the Fed will mercifully pause rate hikes soon – or even start slashing them later this year to resuscitate growth.
That’s making the March employment figures even more pivotal than usual. While economists expect a solid 200,000 payroll gain with the jobless rate stuck at 3.8%, any upside surprises could embolden the Fed to maintain its hair-trigger tightening stance for longer – or worse, hike rates even higher to subdue inflation.
Given the swirling clouds of uncertainty enshrouding Wall Street, whipsaw volatility seems inevitable in the days and weeks ahead.
“Volatility is poised to remain heightened with indecisive price action likely the path of least resistance near-term,” warned Kyle Rodda, a market analyst at IG Group.
Reflecting that troubling new reality, the yield on the policy-sensitive 2-year Treasury note cratered to around 4.03%, as traders sought refuge in less-risky assets. Gold spiked 1.3% higher too in a flashing “fear” signal, while the U.S. dollar muscled up against other major currencies as traders looked to batten down the financial hatches.
Make no mistake: Until the economic picture clarifies and the Fed’s path forward comes into sharper focus, investors may have to buckle up and brace themselves for more gut-wrenching trading sessions as recession jitters mount.
As Stovall put it: “With valuations still in nosebleed territory, more equity indigestion could be unavoidable as these overheated gains get partially digested.”
