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Wall Street Pros Say Fears of Fewer Fed Cuts Sparking Selloff
(Bloomberg) -- The Federal Reserve did what markets expected Wednesday. But that didn’t stop investors from dumping risk assets in droves.
Stock sold off violently at the end of the session after the Fed cut interest rates by a quarter of a percentage point, its third straight reduction, and Chair Jerome Powell indicated that the central bank will likely put further reductions on hold while inflation stays above its 2% target.
The S&P 500 Index, which was up slightly before the announcement, plunged 3% for its worst “Fed Day” since March 2020, when the central bank made an emergency cut on a weekend in response to the Covid pandemic. Fewer than 20 of the benchmark’s stocks closed in the green. The risk off move was most acute in small-capitalization shares, with the Russell 2000 Index sinking 4.4% for its biggest decline since June 2022.
Treasury yields soared on the news, marking their biggest hawkish move on a Fed decision day since the taper tantrum in 2013. Fear rippled through the market, with the Cboe Volatility Index, or VIX, leaping to 28, the highest since the August volatility shock.
Here’s a sense of how Wall Street pros reacted on Wednesday afternoon:
Mark Luschini, chief investment strategist at Janney Montgomery Scott
The cut wasn’t surprising. There was almost a 100% probability priced in. But I think there was some concern about the language that accompanied the news. Not just about the data, but also the policy initiatives of the upcoming administration. The market was expecting two to three cuts next year, and leaning more heavily toward three. Now it seems like we should be on the lighter side of two. The market is factoring in something that should’ve been known but wasn’t fully baked in. I think this is a bit of an overreaction, a knee-jerk move off something that should have been known. It isn’t like the market was shocked by an indication of just one cut next year. So it seems a bit overdone.
Jamie Cox, managing partner at Harris Financial Group
The stock market got way over its skis ahead of this meeting and this is a good way to shake some people out before the holidays. Stocks are expensive — especially tech shares — so people are quick to sell and lock in profits ahead of the holidays. The rate decision was just a catalyst to get people to do what they were going to do anyway — sell early and be done after a stellar year in the stock market.
Michael O’Rourke, chief market strategist at Jonestrading:
You had the whole entire fed funds curve shift higher. You saw that show up in two-year yields and the 10-year yields. The spike in yields is just putting more pressure on risk assets. Of course we didn’t price in any of the concerns about a more hawkish interest-rate outlook, and markets have been on a tear. This is signaling it’s a good reason to take some chips off the table ahead of year end. It’s a reason for profit taking. What’s gone up the most is going to feel the most of the pain in the near term here.
Jim Awad, senior managing director at Clearstead Advisors
There are now rapidly diminishing expectations for rate cuts next year. The market seems to think we’re down to just one cut next year, and that means higher inflation for longer, higher rates for longer, and all that hurts stock valuations. It makes the deficit problem worse as funding costs go up. Overall this is a negative cocktail for risk assets, and it is spooking the market.
Chris Zaccarelli, chief investment officer at Northlight Asset Management
The Fed tried to give the market what it wanted, but the gift was not well received. The market is forward-looking and ignored the 25-basis-point cut today and instead focused on the lack of cuts for next year. Only two cuts were penciled in, which is much less than the market was expecting and clearly investors are not pleased with the projected future path of rates.
Steve Sosnick, chief strategist at Interactive Brokers
Most interesting to me is the reaction of bonds. I don’t know why Fixed Income traders would be surprised to the tune of 9-12 basis points unless they were very dismayed by the potential for more cuts. Then the rising rates strengthened the dollar, then the stronger dollar hit multinationals. Look at VIX. That jump screams ‘I need protection now!’
--With assistance from Esha Dey.