Well, Wednesday turned into a rout on Wall Street, and there was no late-session stick save. In fact, the selling accelerated into the close, which means there was probably a systematic element to it.
As noted, the “slow bleed”/”death by a thousand cuts” narrative is taking hold as investors fret about late-cycle pressures, peak profits and the prospect of a looming Fed mistake that finds a data-dependent Jerome Powell hiking the economy into a slowdown.
In that linked post, we illustrated a variety of sore spots, from homebuilders, to regional banks to autos, but as ever, there is perhaps no more ominous sign for the market than underperformance by Tech and Growth. On Wednesday, we got both (which isn’t surprising because after all, they’re somewhat synonymous).
Let’s just run through a couple of charts here, because clearly, things went awry.
Wednesday was one of only a handful of sessions in 2018 when Growth underperformed Value by 1% or more. Some other notable examples are annotated on the bar chart.
Wednesday was the worst day for the Nasdaq since summer 2011.
Wednesday also saw the largest spike in the Nasdaq VIX since February.
The FANG+ index is screwed.
Remember Netflix’s big earnings blowout? Yeah, well, it’s now fallen in five of the last six sessions and today was especially brutal. This was the worst day for the shares since July 2016.
That’s ok, they can always sell some more junk bonds, right?
The S&P is on the edge of a correction and has now erased its gains for 2018.
The question now is how much further stocks have to fall to force a Fed relent. The Fed put is no longer struck ATM, and at this point, it’s pretty clear that stocks would need to drop enough to meaningfully tighten financial conditions for Jerome Powell to back down. If it’s tightening financial conditions you’re looking for, do note that the dollar at YTD highs will of course exacerbate any tightening pressure exerted by falling equities.
The market appears to think the Fed might get cold feet. As Nomura’s Charlie McElligott wrote Wednesday morning, EDZ8-9 is now only tipping 46bps worth of hiking next year in contrast to the dots. Meanwhile, EDZ9-0 is inverted again – so, “no hikes” in 2020.
“This effectively communicates that the market anticipates the Fed’s hiking cycle to be wrapped by ~mid-2019, with the Fed EASING equally likely to begin in 2020,” McElligott reminds you.
Of course if you ask Donald Trump – and also tech investors – Jerome Powell should have started easing yesterday.