Seeing Red: Sell-Off Sends Markets Reeling Amid Rate Worries

Rate concerns and worries ahead of earnings season helped push stocks down to their worst one-day loss since last February. Tech took the worst of it, with most of the FAANG stocks falling sharply as investors seemed to run from risk.
5 min read

Key Takeaways

  • Stock market has worst day since February as rate worries help trigger sell-off

  • Techs lead the way down, with financials also getting hit hard

  • Yields fall near end of day after staying higher much of session 

(Wednesday Market Close) The noise you might be hearing is the stock market getting slammed.

Fears about higher rates and what earnings season might bring helped send stocks reeling to their worst daily drop since last February. Tech took the brunt of the blow, with most of the FAANG stocks falling sharply as investors seemed to run from risk.

Let’s face it: Today wasn’t pretty, as investors fretted about rising rates and pulled money out of formerly high-flying tech stocks. Most of the major tech names crumbled in the mid-single digits percentage-wise, and the S&P 500 (SPX) took out key moving averages, including the 50-day, on its way down.

The Dow Jones Industrial Average ($DJI) plunged more than 800 points, a 3.1% drop, while the Nasdaq slid more than 4% amid the tech breakdown. Volatility zoomed up as the VIX rose an astonishing 43% to top 22, up from lows of around 11 last month. 

If all this brings back memories of the correction that occurred early this year, it’s no wonder. There’s no correction yet for the SPX, because a correction means a 10% drop from the high. However, believe it or not, the last two days have taken the SPX about halfway there. It’s down roughly 5% from its Sept. 21 intraday high of nearly 2941.

The bloody battlefield after Wednesday’s session was littered with tech names as well as some like Facebook (FB) that until recently were in tech but now dwell in the new “Communication Services” sector. Communiction Services fell nearly 4%, while tech fell nearly 5%. Some of the major losses included Amazon (AMZN) falling 6%, FB down 4%, and Netflix (NFLX) down more than 8%. Microsoft (MSFT) and Apple (AAPL) both fell sharply.

For a while there around midday, it looked as if the SPX had found some support near the 2840 level, but once that fell apart, a little panic selling took over and sent it well under 2800 by the end of the day. The 200-day moving average of near 2765 heading into Wednesday could be an important level to watch tomorrow.

The late selling in the SPX, which is somewhat over-weighted toward financials, might also have reflected a mid-session change in fortunes for bank stocks. The financial sector had been weathering things pretty well up until around the last hour, but then went from basically unchanged or even a little up, to down 2% to 3.5% pretty quickly. When you have that kind of dramatic change in an over-weighted sector, that’s when things tend to fall apart. Most of the big banks, including JP Morgan (JPM) and Goldman Sachs (GS), took big hits Wednesday.

This is the first five-session losing streak for the SPX since December 2016, and the worst day for tech stocks since August 2011, according to media reports.

Shifting Sector Sands

We talked a bit this morning about “shifting sands” in the market. The last week shows people pulling money out of info tech, and that money appears to be potentially shifting into what some people used to call “flight to safety” investments like staples, utilities, and the U.S. dollar (though even staples and utilities got swept up in Wednesday’s wash-out). While no market investment is really “safe,” some investors seem to be flinching in fear that rising yields might ultimately drag the economy. In a slower-growth environment, dividend-paying investments like utilities and staples sometimes get more love.

It also appears that some investors might be taking money out of the markets altogether and shifting into cash ahead of Thursday’s consumer price index (CPI) report and Friday’s slew of big bank earnings. What points to that? The fact that fixed income and gold didn’t see much buying even as stocks sold off Wednesday. 

Typically when there’s trouble in stocks, some investors come in and buy fixed income as a possible safety play—though again, nothing is really “safe” when you invest. Bonds did finish slightly higher on the day, but spent much of the session actually lower. Gold climbed less than 0.5%. The scientific word for today’s market might be “wonky.” This is an odd sell-off, and people don’t seem sure what to do. 

The market’s shakiness comes right on the cusp of earnings season, and there’s a bit more concern about what it might show. Are higher materials and energy prices crimping profit margins? Are companies dialing down expectations based on tariffs against China or the rising cost of goods? Answers to some of those questions might be heard on conference calls in the coming weeks, so consider paying close attention. Remember, the hard numbers for Q3 reflect what’s already happened. The conference calls put the spotlight on CEOs’ expectations for Q4 and beyond.

Arguably, the ground is shifting under the market right now, and the next two days of numbers—first on inflation and then from the banks—could really help show where things might go for the rest of the month. Judging by today’s action, some investors are simply moving money to the sidelines until they see what the next two days unveil, and tomorrow could bring continued nervous trading.

FIGURE 1: FIGURE 1: Rough Day for Nasdaq: The Nasdaq (COMP) plummeted to early July levels Wednesday in the biggest sell-off since February. That made it the worst-performing major index on the day. The small-cap Russell 2000 (purple line) was the best-performing index Wednesday, down less than 3%. Data Sources: Nasdaq, FTSE Russell.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Key Takeaways

  • Stock market has worst day since February as rate worries help trigger sell-off

  • Techs lead the way down, with financials also getting hit hard

  • Yields fall near end of day after staying higher much of session 

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