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This is a very bad pass for US stocks, which was limited by the fall of more than 830 points recorded Wednesday by the Dow Jones Industrial Average.
To recap: the Dow
DJIA, -3.15%
and the S & P 500 index
SPX, -3.29%
experienced their worst day since February 8, while the Nasdaq Composite Index
COMP -4.08%
has experienced its worst skid in a single session since Brexit, when the UK voted in favor of the exit of the European Union, shaking world markets in 2016.
Wednesday's action was not nearly as bad as Brexit's, but it dampened the recovery, which was driven mainly by the strength of the national economy and the benefits of tax cuts in the economy. companies.
So, what's next? And what led to a general denial of stock market indices that were testing new highs about a week ago?
Rising rates hurt
The rapid rise in bond yields, which is rising as prices fall, has raised fears that US corporate profit margins will be held back by higher labor costs and borrowing costs. higher. The 10-year Treasury Bill
TMUBMUSD10Y, -0.24%
a public bond used to fix the prices of mortgages, auto loans and other debts saw its yields rise to a seven-year high (rates fell somewhat due to Wednesday's fall in shares).
"The sale of today's shares is a reaction from investors, who finally realized that interest rates were higher than ever, and given the high level of equities, market participants were probably looking for a reason to sell. Higher interest rates generally lead to tighter financial conditions, which could dampen growth and equity markets react to this, "said Charlie Ripley, Senior Strategist at Allianz Investment Management.
Check-out: 3 reasons why US government bond yields soar
FANG stocks are dumped
The increase in borrowing costs has had a more pronounced effect on mega-capitalization companies such as Amazon.com Inc.
AMZN, -6.15%
and Netflix Inc.
NFLX, -8.38%
, part of a group of so-called FANG constituents (also including Google-parent Alphabet Inc.
GOOGL, -4.63%
and Facebook Inc.
FB -4.13%
), which had a disproportionate influence on the wider market because of their market value. Wednesday, Amazon lost 6.2%, which is its worst day since February 2016 and has virtually erased all gains in the last three months, according to data from FactSet. Shares of Netflix fell 8.4% Wednesday, representing their worst daily slump since July 19, 2016.
That said, Amazon shares have risen 50% since the beginning of the year and Netflix shares have returned 70% since the beginning of the year, even taking into account Wednesday's unrealized gains.
Recent measures suggest that investors risk selling their winners and transferring money elsewhere, some market participants said.
Volatility of October
In the first eight sessions of the fourth quarter, the Nasdaq is down almost 8%, its worst start to the quarter since the first three months of 2016 and the worst beginning of the fourth quarter since 2008, according to Dow Jones Market . The data. The Dow is down 3.3%, reflecting its worst start in the fourth quarter, as it fell 22% in the first three months of 2008.
In season, October is a bad time for the markets.
Lily: Opinion: Fasten your seatbelt for stocks: October is almost here
Tank of industrial stocks and materials
Part of the negative feeling has been attributed to a warning of PPG Industries Inc.
PPG + 1.06%
, which said Monday that the paint and coatings company was raising the prices of all automotive equipment manufacturers' products by an average of 10 percent to combat rising inflationary pressures.
CNBC's Jim Cramer said the PPG earnings warning could point to a broader weakness in an industry and materials sector that had already been shaken by fears of trade clashes between the United States and the United States. China.
Technical failure
In addition, the benchmarks have experienced a number of technical failures or near-failures. The S & P 500 broke a string of 74 sessions without moving by 1%, reflecting the longest sequence of this type since the period ended January. The S & P 500 also fell below the 50-day moving average to 2,879.39 and is above its 200-day average of 2,765.51. Technical analysts observe moving averages to help determine bullish and bearish trends of an asset, a breach below a trend line generally indicating that optimism has come to an end – at least momentarily .
Meanwhile, the Nasdaq reached a number of hits below its 200-day average of 7,498.59.
Source: FactSet
Dow remained above its 200-day trend line but closed below 50 days at 25,995.09.
Rotation
Some market participants argue that investors were shifting away from growth-driven strategies to valuing equities, which were no longer as popular as stocks in growing technology companies. Market participants tend to turn to value-based companies that have been forgotten in the final stages of an economic cycle, before a recession.
This change could be taken now.
"There is no planet where a sector sensitive to the rate of outperformance as rates rise. It makes sense that the technologies are used daily in the woodland sector: value has increased relative to growth and, in general, people sell their big winners in panic. You do not get + 60% per year in the NFLX without a few -15% weeks here and there, "wrote Michael Antonelli, stock trader at R.W. Baird & Co., in a note on Wednesday.
The Russell 1000 Growth Index
RLG, -4.02%
a growth indicator (shown in green in the graph below) and the Russell 1000 Value Index
RLV -2.54%
both declined, but a more pronounced decline occurred for so – called growth names.
In addition, the value index has almost stabilized over the past three months, while growth has decreased by 1.7% over the same period.
Source: FactSet
Fed policy error
President Donald Trump partly blamed the US Federal Reserve on Wednesday for the headwinds of the market. "I think the Fed is making a mistake. It's so tight, I think the Fed has gone crazy, "he said, reiterating his criticism of the central bank's intention to normalize interest rates over levels of the crisis and prevent overheating of the economy.
CNBC's Cramer and others also argue that a policy mistake by the Fed could be the cause of market loss.
Is it time to panic?
Some market participants say it's not quite time to panic, but beware.
"I expect the sale to be similar to the one we experienced earlier in the year and that in the end it will prove to be a good buying opportunity. for investors who have a longer time horizon and whose portfolio matches their risk tolerance, "said Chris Zaccarelli, investment director at the Independent Advisor Alliance.
"How long can this little correction last? Well, the end of 2015 lasted about seven months, but it was a total earnings recession. I do not think we are facing it at the moment, "wrote Antonelli in a note, referring to the market slowdown that occurred in 2015, partly caused by concerns about a slowdown in the Chinese economy.
"This kind of move is also good for one thing: make a shopping list of all the names you wanted to have lower down and say 'Here's my chance, let me do homework and see if I still like it' . Opportunities still abound, my friends, you just have to find it, he says.
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