Wall Street closes sharply lower as abrupt sell-off snaps rally

NEW YORK: US stocks closed lower on Wednesday (Dec 20) after an abrupt mid-afternoon nosedive ended Wall Street’s impressive rally, which had been driven by falling interest rates and the Federal Reserve’s (Fed) dovish turn.

The Dow Jones Industrial Average fell 475.92 points, or 1.27%, to 37,082, the S&P 500 lost 70.02 points, or 1.47%, to 4,698.35 and the Nasdaq Composite dropped 225.28 points, or 1.5%, to 14,777.94.

All 11 major sectors in the S&P 500 closed in the red, with consumer staples suffering the steepest percentage decline after packaged food company General Mills cut its sales forecast.

Stocks were “near all time highs, they hit resistance”, Jay Hatfield, portfolio manager at InfraCap in New York, noting the downturn was “surprisingly vociferous, things went from hot to cold real fast”.

“It’s surprising how aggressive the sell-off is, but it makes sense considering how far we’ve come,” he added.

Some traders said the selloff could have been aggravated by large purchases of near-term put options on the S&P 500, including put contracts that would guard against a drop below the 4,755 level on the index by the end of the session.

Put options convey the right to sell shares at a fixed price in the future and at times options-linked hedging activity can heighten volatility.

During the session, the S&P 500 got within 0.5% of its all-time closing high. Reaching a new closing high would have confirmed the benchmark index had been in a bull market since closing at the bear market floor in October 2022.

The index is now more than 2% below its record closing high.

“We’ve had this aggressive rally in December and investor sentiment is high, it went from bearish to bullish in almost record time,” said Thomas Martin, senior portfolio manager at Globalt in Atlanta. “So the markets are asking ‘now what?’”

At the conclusion of its policy meeting last Wednesday, the Federal Open Market Committee signalled that it had reached the end of its tightening cycle and opened the door to rate cuts in the coming year.

Chicago Fed president Austan Goolsbee late Tuesday reiterated that the rate at which inflation cools to the Fed’s annual 2% target will drive policy on rate reduction.

At last glance, financial markets were pricing in a 71.1% likelihood of that first cut arriving as soon as March, according to CME’s FedWatch tool.

On the economic front, bigger than expected jump in US consumer confidence and a surprise increase in existing home sales helped turn the major indices green.

The Commerce Department is expected to wrap up the week with its third and final take on third-quarter gross domestic product on Thursday, to be followed on Friday by its wide-ranging personal consumption expenditures report, which will cover income growth, consumer spending and, crucially, inflation.

FedEx slid 12.1% after the package deliver missed quarterly profit estimates and cut its full-year revenue forecast. FedEx rival United Parcel Service dipped 2.9%.

Alphabet gained 1.2% after the company announced it was restructuring Google’s ad sales unit. – Reuters

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