Turmoil erupted on Wall Street Monday, with major indexes suffering deep losses as escalating geopolitical risks and worries over Federal Reserve rate hike plans sparked a withering selloff.
The S&P 500 bore the brunt of the carnage, plunging 1.2% to 5,061.82 – its first close below 5,100 in over a week. The broad index has now hemorrhaged 2.6% over the past two sessions, marking its biggest two-day rout since early 2023.
The Dow Jones Industrial Average wasn’t spared, shedding 0.7% or 226.34 points to end at 32,417.73. But it was the Nasdaq Composite that took the most severe beating, with the tech-heavy index cratering 1.8% to 12,347.72 as investors frantically exited richly-valued growth and technology shares.
Monday’s selloff abruptly halted the market’s upward momentum, which had been fueled by hopes that the Fed could soon pause and eventually reverse its aggressive rate hiking campaign as inflation pressures subside. However, those rate cut bets were aggressively pared back after the 10-year Treasury yield jolted higher to fresh 2024 peaks around 4.63%.
“The spike in yields is really scaring equity investors who had gotten ahead of themselves in pricing in multiple Fed rate cuts over the next year,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
The yield surge reflected escalating concerns that stubbornly elevated price pressures could force the central bank to keep rates higher for longer to fully tame inflation. Trader expectations for future rate cuts were slashed after a surprisingly strong March retail sales report showed consumer spending remains buoyant despite higher borrowing costs.
Adding to the cauldron of uncertainty was a dangerous flare-up in hostilities between Iran and Israel over the weekend. On Saturday, Iran launched a barrage of missile and drone strikes targeting Israel, ratcheting up longstanding tensions between the adversaries.
While the attack was telegraphed in advance and damage was limited, crude oil prices pared earlier declines as traders braced for potential supply disruptions if Israel opts for a forceful military response that spirals into a wider regional conflict.
“The confrontation in the Middle East is just adding another wildcard to a market already grappling with Fed policy uncertainty and signs that the economy may be stalling,” said Kaisa Stucke, investment strategist at HFH Wealth Management. “This multipronged wall of worries is spooking investors.”
Across the market, steep losses were widespread as the prospect of higher rates for longer and geopolitical jitters sparked a defensive rotation. Every sector finished lower besides utilities and healthcare, with economically-sensitive pockets getting hit hardest.
Information technology led the market’s descent, collapsing 2.5% as soaring Treasury yields battered interest rate-sensitive growth stocks. Consumer discretionary and communication services names also cratered more than 2%.
The blistering tech rout showed few winners, with megacaps like Tesla (TSLA), Amazon (AMZN), Apple (AAPL) and Nvidia (NVDA) all sustaining heavy damage as investors fled expensive, high-multiple shares.
Tesla skidded 5.2% lower after the electric vehicle maker confirmed plans to trim its workforce amid slowing growth in the EV industry. Salesforce (CRM) shares also got smacked, plunging 7.8% after reports the cloud software giant is in talks to acquire data management firm Informatica (INFA).
Even the financial sector, initially buoyed by strong bank earnings from Goldman Sachs (GS), succumbed to selling pressure amid the brutal tech beatdown. Goldman shares jumped nearly 4% after the Wall Street titan posted better-than-expected quarterly profits, but still closed well off session highs.
Once sky-high hopes that cooling inflation would prompt an imminent Fed policy pivot toward easier money have been completely recalibrated in recent weeks. With Monday’s scorching hot retail sales report showing spending remains resilient, concerns are intensifying that the central bank may need to continue tightening well into 2024 to fully extinguish embedded inflation pressures.
“The Fed has signaled they want to see a lot more clear and convincing evidence that core inflation is coming down before they stop raising rates or even contemplate cutting them,” said Gargi Chaudhuri, head of investment strategy at iShares. “Based on today’s data, that bar hasn’t been met yet.”
The specter of higher rates for longer is particularly unsettling for the rate-sensitive technology and growth sectors. With valuations already richly stretched after years of ultra-low rates, pricier areas of the market face an increasing gravitational pull lower the more hawkish the Fed’s policy outlook becomes.
Monday’s bout of intense market volatility likely previews what’s to come over the next several months as investors attempt to navigate conflicting signals on the economic trajectory. Crosscurrents from evolving geopolitical risks, corporate earnings revisions, and the Fed’s fluid policy response to inflation data will keep traders on their toes.
While the S&P 500 is still up over 6% for 2024 so far, the market’s hard-fought yearly gains have been steadily eroded as macroeconomic and geopolitical uncertainties proliferate. What was once expected to be a year of robust stock market returns is rapidly devolving into a white-knuckle ride across turbulent crosswinds.
“There are just so many balls in the air right now for the market to keep track of,” David Bahnsen, chief investment officer at The Bahnsen Group, said on Yahoo Finance Live. “The lurking fear is that some kind of policy error brews in the fog created by the complexity of these intertwined risks. That’s keeping investors very much on edge.”
