S&P 500 and Nasdaq extend selloff ahead of Fed minutes

What’s driving markets

U.S. stocks retreated further on Wednesday morning with investors cautious as they parsed the reasons for why the new year got off to a bad start for many of 2023’s big winners ahead of the minutes from the Fed’s December policy meeting.

“Financial markets experienced a jittery start in 2024, juxtaposed against the backdrop of a robust pan-markets year-end rally”, said Nigel Green, CEO of the deVere Group. “This oscillation in market sentiment, driven by various factors including tensions in the Red Sea – a key global trade route – serves as a stark reminder that investors must avoid complacency in the face of uncertainty.”

The Nasdaq Composite, which is heavily weighted with technology stocks, surged 43% last year, with a large chunk of that coming in the last two months, as investors made bets that easing inflation will allow the Fed to cut borrowing costs swiftly in 2024.

Hopes that companies like Microsoft
MSFT,
+0.17%
and Nvidia
NVDA,
-0.71%
will benefit from AI adoption also powered the rally.

However, the first trading day of the year on Tuesday saw the Nasdaq Composite shed 1.6%, it’s biggest drop in more than two months, and the broader S&P 500 fall 0.6%.

The cause of the pullback — which marked the Nasdaq’s fourth worst start to a year in its history, according to Bespoke Investment — was still being debated as the new session progressed.

A downgrade of Apple
AAPL,
-0.85%,
the market’s biggest constituent, from neutral to underweight by Barclays, did not help the mood, particularly as it touched a nerve that some big-tech valuations appeared stretched and the market looked overbought following a nine-week winning streak.

Geopolitical tensions also are continuing to take a toll amid fears of naval conflict in the Red Sea and following news of the assassination in Lebanon of a senior Hamas leader.

And investors remain wary of a move higher in Treasury yields, which is continuing on Wednesday, with the 10-year note
BX:TMUBMUSD10Y
up to 3.998% having traded around 3.80% just last week.

The rebound in yields reflects growing skepticism about the chance of near-term interest rate cuts by the Federal Reserve, according to Henry Allen, analyst at Deutsche Bank.

“Clearly, investors are still pricing in a Q1 rate cut as more likely than not, but there’s been a bit more doubt over the last 48 hours as to whether the aggressive rate cuts priced for 2024 will actually end up happening,” said Allen.

The timing and pace of any changes to interest rates this year will depend on the economic data, Richmond Federal Reserve President Tom Barkin said Wednesday.

In U.S. economic updates, job openings in the U.S. dipped to a 32-month low of 8.8 million in November from revised 8.9 million in prior month, the U.S. Bureau of Labor Statistics said in the JOLTS report on Wednesday. That’s seen as another sign that a prolonged U.S. hiring boom is fading in response to higher interest rates.

Meanwhile, the December ISM manufacturing report showed U.S. economic activity in the manufacturing sector contracted in December for the 14th consecutive month, according to the Institute for Supply Management on Wednesday. The U.S. manufacturing PMI rose to 47.4 in December, after being unchanged at 46.7 for two straight months. Any number below 50% reflects a shrinking economy.

Companies in focus

• Shares of Apple Inc. were slumping for a second straight day Wednesday, down 1% after suffering its biggest drop in 4 months following Barclay’s downgrade.

• Moderna Inc.’s stock
  MRNA,
  -0.46%
  was off 2% after leading the S&P 500 index gainers in the previous session, as Oppenheimer upgraded the stock to the equivalent of buy and said it expects the biotech to have five products approved by 2026.