In a sudden reversal, U.S. stock indexes experienced a setback on Wednesday, interrupting the impressive rally that had propelled the Dow Jones Industrial Average to record highs. The S&P 500 witnessed its most significant one-day percentage decline since September, sliding 1.5%, while the Dow industrials and the Nasdaq Composite both saw drops of 1.3% and 1.5%, respectively. These losses marked the worst performance for all three indexes since October.
The downturn came after a robust nine-session winning streak for the Nasdaq and the Dow, fueled by optimism generated when Federal Reserve Chair Jerome Powell hinted at the possibility of interest-rate cuts during the central bank's policy meeting last week. Despite early gains on Wednesday, the markets succumbed to selling pressure, resulting in a pullback by the end of the session.
Investors had been riding high on the expectation of interest-rate cuts, with the Fed's latest projections indicating the likelihood of at least three rate cuts in the coming year. However, the markets appeared to be anticipating even swifter and more substantial cuts, with traders now pricing in a 73% chance of a rate cut at the Fed's March policy meeting, a significant increase from the 28% probability just a month ago, according to CME Group's federal-funds futures.
Federal Reserve officials, attempting to manage expectations, have downplayed the possibility of a March cut in recent public statements. This divergence in expectations reflects a recurring trend where markets often project a more rapid decline in inflation and more aggressive rate cuts than the Fed signals.
Analysts caution that the markets might have become overly optimistic, with Christoph Schon, senior principal of applied research at Axioma, noting the danger of overexcitement.
Recent economic data suggests a slowdown in the economy, creating conditions for inflation to cool without plunging the U.S. into a recession. However, concerns linger about achieving the Fed's 2% annual inflation target.
The yield on the 10-year U.S. Treasury note, a key indicator for borrowing costs, reached 3.876%, its lowest level since July. FedEx's quarterly earnings report, revealing weakening demand, contributed to a 12% drop in shares, the steepest one-day decline since September 2022. General Mills faced a 3.6% decline after reporting reduced sales, citing softening demand for snacks and breakfast foods.
Despite the broad market retreat, the rally in oil markets persisted, buoyed by disruptions to shipping in the Red Sea, with Brent crude reaching $79.70 a barrel, a 0.6% increase. The diverse economic indicators and conflicting signals leave investors and analysts closely watching forthcoming data to navigate the evolving landscape of U.S. financial markets.
