United States stocks experienced a sharp decline on Wednesday, with all three major indexes posting their steepest daily losses in months.
This downturn followed the Federal Reserve’s decision to reduce interest rates by a quarter of a percentage point, accompanied by projections indicating a more cautious pace of easing next year.
The Fed’s rate cut of 25 basis points brought the range to 4.25%-4.50%. However, its summary of economic projections (SEP) suggested a total rate cut of only half a percentage point by the end of 2025, reflecting a robust labour market and stalled progress in reducing inflation.
The chief market strategist at F.L. Putnam Investment Management in Wellesley, Massachusetts, Ellen Hazen said, “If you look at the changes to the statement of economic projection, they really had no choice.
“So as you look at all the changes that they made, it’s very clear that the economy is running a lot hotter than their previous projection. And that has got to contribute to their desire to potentially pause.”
According to Reuters, the Dow Jones Industrial Average fell by 1,123.03 points, or 2.58%, to 42,326.87. Similarly, the S&P 500 lost 178.45 points, or 2.95%, closing at 5,872.16, while the Nasdaq Composite dropped 716.37 points, or 3.56%, to 19,392.69.
The Dow marked its 10th consecutive day of losses, its longest streak since 1974, with the Dow and S&P recording their largest one-day percentage drops since 5 August. The Nasdaq’s decline was its biggest since 24 July. Meanwhile, the Russell 2000 index suffered a 4.4% drop, its largest since June 2022.
Despite the losses, the Dow remains up nearly 12.3% for the year, while the S&P has rallied about 23%, and the Nasdaq has surged over 29%, driven by gains in technology stocks and optimism surrounding artificial intelligence and a potentially lower rate environment.
However, concerns persist about the potential inflationary effects of tariffs under President-elect Donald Trump’s administration.
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The CBOE Volatility Index, a measure of near-term market fluctuations, spiked by 11.75 points to 27.62, its highest in four months. Concurrently, U.S. Treasury yields climbed, with the 10-year note hitting 4.518%, its highest since May.
“You’ve got the 10-year creeping back up, around that 4.5% and particularly the 5% level that’s been a real problem for equity markets,” said Ross Mayfield, an investment strategist at Baird in Louisville, Kentucky.
“Probably the most obvious headwind or point of contention for markets in the first quarter of next year is whether the markets interpret the policies on the table as inflationary and, or, pro-growth.”
Markets now anticipate that the Fed will maintain current rates in January, with only 33 basis points of cuts priced in for 2025, down from 49 basis points earlier. Higher interest rates typically weigh on equity markets by increasing the appeal of safer assets and curbing corporate earnings growth potential.
All 11 major S&P 500 sectors declined, with real estate and consumer discretionary sectors leading the losses, dropping 4% and 4.7%, respectively. Cryptocurrency-related stocks also fell sharply, exacerbated by Fed Chair Jerome Powell’s comments that the central bank is not permitted to own bitcoin.
Speculation over potential changes under Trump’s administration failed to offset losses, as MicroStrategy tumbled 9.5%, MARA Holdings plunged 12.2%, and Riot Platforms dropped 14.5%.
Declining stocks outnumbered advancing ones by a ratio of 9.49 to 1 on the NYSE and 5.46 to 1 on the Nasdaq. The S&P 500 reported six new 52-week highs and 27 new lows, while the Nasdaq Composite logged 80 new highs and 264 new lows.
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