Wall Street's autumn chill is turning into a freeze.
U.S. stocks extended their retreat on Tuesday afternoon, with the S&P 500 index SPX and Dow Jones Industrial Average DJIA logging a fourth consecutive day of losses.
The selloff has pushed several major indexes roughly halfway to correction territory, raising concerns about whether the market downturn might snowball into something bigger before year-end.
The S&P 500 finished 0.8% lower on Tuesday, while the blue-chip Dow index ended down 1.1%, marking the fourth straight day of declines for both, as highflying megacap technology stocks came under more pressure. It was also the longest losing streak for the S&P 500 since Aug. 21, according to Dow Jones Market Data.
The tech-heavy Nasdaq Composite COMP was 1.2% lower Tuesday, suffering its second straight day of losses, according to FactSet data.
Four straight days of losses had the blue-chip index down about 4.5% from its record close nearly a week ago (see table below), while the small-cap benchmark Russell 2000 index RUT was more than halfway to a correction.
A correction is typically defined as a market drop of at least 10% from a prior high, based on closing levels, while a bear market is usually defined as a decline of 20% or more.
Recent losses in U.S. equities haven't been limited to a single stock sector: There are 324 stocks in the S&P 500 that have already fallen at least 10% from their 52-week highs, according to a tally from Dow Jones Market Data.
The selloff in November has been broad-based, dragging down many corners of the financial market, including tech giants MAGS and industrials XX:SP500.20, as well as bitcoin (BTCUSD).
Investors have found a few safe havens, including healthcare XX:SP500.35 and consumer staples XX:SP500.30 - sectors traditionally viewed as defensive plays during periods of elevated market volatility. Gold (GC00) was off its peak but still up 2.1% so far in November.
Wall Street has been adopting a risk-off posture due to valuation worries, anxiety around household spending, employment angst and elevated inflation rates, which could keep the Federal Reserve on hold in December in terms of another interest-rate cut this year, said José Torres, senior economist at Interactive Brokers.
The U.S. central bank last month voted to lower the target range for the federal-funds rate by a quarter of a percentage point, to a range of between 3.75% and 4%, and it announced plans to stop shrinking its balance sheet as of Dec. 1. Despite the delay in economic data due to the government shutdown, recent reports were enough to make investors reassess whether a December interest-rate cut is still written in stone, said Brian Leonard, portfolio manager at Keeley Gabelli Funds.
Investors have scaled back expectations for a December rate cut, with fed-funds futures traders on Tuesday pricing in a 48.9% chance of a rate reduction, down from 90% before the central bank's October policy meeting, according to the CME FedWatch Tool.
"That uncertainty is causing people to reassess where they are at and take profits," Leonard told MarketWatch in a phone interview on Tuesday. "Once you have that profit-taking, it snowballs."
While the stock-market selloff is putting the traditional year-end rally in doubt, some market analysts said a 5% pullback would be normal and technically overdue given highflying valuations of technology stocks.
"The leverage of the correction is amplified by the extreme weight of megacap tech and the fear of an AI bubble," said Louis Navellier, chair and chief investment officer at Navellier & Associates.
Fortunately, tech earnings have been holding up, Navellier said in emailed commentary Tuesday. "The uncertainty is centered around the timing of when the productivity will ramp up and where and how the profits will be made."
Fear is running higher
While fear gauges VIX have been pointing higher on Wall Street, such anxieties could set the stage for a short-term rebound in stocks, according to Michael Toomey, managing director of equities trading at Jefferies.
Among the widely watched sentiment indicators, CNN's Fear & Greed Index, which aims to assess where investors are on a scale ranging from maximally fearful to maximally greedy, dropped to 13 Tuesday, the lowest level since April and one reflecting "extreme fear."
Investor sentiment usually has been considered a contrarian indicator for the stock market, suggesting that it may be a good time to go in the opposite direction of the herd. Extreme bearishness often precedes upward movement in the stock market; conversely, extreme bullish sentiment could be a cue to sell.
Yet some investors have been cashing out this week ahead of a potentially market-moving event: Nvidia's earnings. Wall Street has been awaiting updates on the trajectory of artificial intelligence to either justify or quell enthusiasm in the space, Torres said in emailed commentary on Tuesday.
See: How Nvidia can reassure investors at the biggest earnings event of the quarter
"I think we're setting up for a rally," said Toomey at Jefferies. "Obviously Nvidia [earnings] (NVDA) comes tomorrow night, but from my seat, I think we rally near-term, and it'll be led by the beaten-up momentum names."
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