- Traders decided yesterday that the central bank will fail to achieve any of its policy objectives and struggle to fight inflation amidst the lingering threat of recession.
- The benchmark S&P 500 lost a whopping 3.6%, wiping out about US$1.3 trillion in market value while the tech-heavy Nasdaq bled 5.1%, the most since September 2020
The party was barely getting started when the police arrived.
Barely a day after investors cheered a less-than-aggressive U.S. Federal Reserve monetary policy tightening schedule, traders decided yesterday that the central bank will fail to achieve any of its policy objectives and struggle to fight inflation amidst the lingering threat of recession.
Investors sold off everything, stocks, bonds, cryptocurrencies – anything and everything collapsed in a sea of red in a blood bath that left traders slack-jawed at the depth and extent of the crash.
The benchmark S&P 500 lost a whopping 3.6%, wiping out about US$1.3 trillion in market value while the tech-heavy Nasdaq bled 5.1%, the most since September 2020.
Leading the losses were the most speculative corners of the market, including expensive software stocks and loss-making tech firms, while Bitcoin, that bellwether of speculation, that had earlier tested US$40,000 slipped to US$36,000 at the time of writing.
While the fear is palpable, it’s also slightly bizarre when you consider that the Fed did everything within its power to prevent such a situation.
For starters, the Fed clearly communicated it’s expected rate hikes and stuck to it – there were no surprises.
Not only that, but the central bank also made clear that no jumbo-sized hikes could be expected in the next two meetings, which ought to have calmed even the most frayed nerves.
So, what gives?
One possibility of course is that traders took the rally after the Fed policy meeting as an opportunity to exit their positions, take some money off the table, and that fed into a self-fulfilling spiral as algorithmic traders piled into an increasingly crowded trade.
When one domino falls, the rest is likely to go as well.
While some analysts believe that inflation will need to ease before there can be any durable rally, many of the concerns plaguing markets before the Fed meeting are still there – high labor costs, soaring inflation, the ongoing Russian invasion of Ukraine.
Nothing’s really changed.
And it’s entirely possible that when one market participant sneezes, everyone catches a cold.
Given the number of variables at play in the markets now, there’s just too much uncertainty to call a bottom or a top, but it may be a great time for long-term investors to dollar-cost average on some names that are durable, while keeping some cash for more buying opportunities down the line.