Wall Street closed sharply lower on Wednesday as the minutes of the December FOMC meeting of the Fed showed discussion regarding faster-than-expected shrinking of the central bank’s gigantic balance sheet and raising rates. All three major stock indexes ended in negative territory.
How Did The Benchmarks Perform?
The Dow Jones Industrial Average (DJI) tumbled 1.1% or 392.54 points to close at 36,407.11, marking the index’s worst daily percentage drop since Dec 20. In intraday trading, the blue-chip index recorded an all-time high of 36,952.65. Notably, 17 components of the 30-stock index ended in green while 13 in red.
The tech-heavy Nasdaq Composite finished at 15,100.17, sliding 3.3% or 522.54 points due to weak performance by large-cap technology stocks. This was the tech-laden index’s sharpest daily percentage decline since Feb. 25, 2021.
Meanwhile, the S&P 500 tanked 1.9% to end at 4,700.58, marking the index’s worst daily percentage drop since Nov 26. All eleven sectors of the benchmark index closed in negative territory.
The Industrials Select Sector SPDR (XLI), the Consumer Discretionary Select Sector SPR (XLY), the Financials Select Sector SPDR (XLF), the Real Estate Select Sector SPDR (XLRE), the Technology Select Sector SPDR (XLK) and the Communication Services Select Sector SPDR (XLC) dropped 1%, 2.5%, 1.2%, 3.3%, 3.1%, 2.7%, respectively.
The fear-gauge CBOE Volatility Index (VIX) was up 16.7%% to 19.73. A total of 12.18 billion shares were traded on Wednesday, higher than the last 20-session average of 10.4 billion. Decliners outnumbered decliners on the NYSE by a 4.32-to-1 ratio. On Nasdaq, a 4.22-to-1 ratio favored declining issues.
Government Bond Yield Rises
The minutes of the Fed’s latest FOMC meeting revealed that Fed officials have aggressively discussed the need to raise the benchmark interest rate and to reduce the size of the central bank’s balance sheet earlier-than-expected. Fed officials would like to see a significant downsizing of the Fed’s $8.8 trillion balance sheet immediately after the tapering of the monthly bond-buy program.
As a result, the yield on the benchmark 10-Year U.S. Treasury Note climbed to 1.70% on Wednesday. The yield was at about 1.71% on Tuesday and 1.65% on Monday. Notably, the yield on the 10-Year U.S. Treasury Note is linked to lending rates for mortgages and many other business and consumer loans.
Higher market risk-free returns mean a higher discount rate for future cash flows from stock investing. This will affect the growth-oriented stocks — especially the technology stocks — as these stocks generally provides higher returns over a long term.
Moreover, these companies depend on easy access to cheap credit to expand their businesses. In fact, the Fed Chairman also indicated that the first hike of the lending rate from the current level of 0-0.25% may come earlier-than-expected. Higher interest rate will be detrimental to technology stocks.
Consequently, shares of technology bigwigs like Apple Inc.
AAPL
, Alphabet Inc.
GOOGL
and Meta Platforms Inc.
FB
slid 2.7%, 4.6% and 3.7%, respectively. Apple currently carries a Zacks Rank #2 (Buy). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
Economic Data
According to the ADP National Employment Report, private payrolls in December jumped to 807,000, surpassing the consensus estimate of 375,000. The ADP report is produced with Moody’s Analytics. Large businesses added 389,000, small businesses added 204,000 and mid-sized businesses added 214,000 jobs, respectively. Moreover, goods producers added 138,000 jobs, the strongest gain of the year. Manufacturing added 74,000 jobs.
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