A placid stock market is suddenly facing threats from all directions.
Worries about interest rates spurred by a surprisingly hot inflation reading collided with growing jitters in the technology sector on Wednesday. And a session that began with rising bond yields and expectations of an October rate increase culminated with the stock market's worst day in months.
It started with an 8:30 a.m. Labor Department report that quickly reset expectations for the Federal Reserve's looming decision on rates. Key components of its consumer-price index rose more than expected last month. Over the next half-hour, U.S. Treasurys sold off sharply. Then stock indexes opened modestly lower. Investors raced to increase bets that the Fed could raise rates at its October meeting -- mere days before the midterm elections.
By midafternoon, a stunning shift was taking shape. A tech selloff that had been brewing was gathering momentum. Investors who have grown wary of some names in the AI trade -- amid concerns over everything from the threat of Chinese competition to rising borrowing costs -- unloaded stocks such as CoreWeave and Oracle. As that downturn snowballed, it sparked a flight back to safer assets, including Treasurys, driving bond yields back lower again.
While markets remain in reach of records even after the day's action, the chaos underscored how sensitive Wall Street is to the twin anxieties of higher-for-longer interest rates and an economy dependent on a single sector.
"The AI stuff is kind of just dominating everything," said Ryan Jungk, a portfolio manager at Newfleet Asset Management. "It's kind of a whirlwind."
By the end of session, the tech-heavy Nasdaq composite and the S&P 500 had both logged their biggest one-day declines since July, with the Nasdaq sliding 1.9% and the S&P 500 dropping 1.1%. The Dow Jones Industrial Average dropped 0.1%, or 49 points.
Following months of relative calm, stocks took a beating across the tech sector, with chip makers, upstart cloud companies and AI hyperscalers all coming under pressure.
It was a second straight day of steep losses for many of the companies associated with the AI trade, which began dropping Tuesday after Broadcom's CEO said that many AI investors "have no clue what they are investing in" and compared the market to a casino.
The worst of the selling Wednesday was concentrated in companies that have borrowed heavily to finance data center build-outs and have signaled plans to keep doing so, making lenders uneasy. Shares of CoreWeave tumbled more than 15% while some of the bonds it issued earlier this year dropped to fresh lows in the secondary market, underscoring investor concerns about its credit quality.
Momentum-chasing strategies that bid up the fastest-rising stocks and sell when prices fall likely contributed to the accelerating selloff Wednesday afternoon, said Art Hogan, chief market strategist at B. Riley Wealth Management.
"We've gone through several rotations in and out of AI darlings, but there's always been a peripheral group that has more debt out there than anybody's comfortable with," Hogan said. "CoreWeave and Oracle fall into that category."
Semiconductor companies, many of which count CoreWeave and Oracle among their biggest customers, were among the other worst performing stocks on Wednesday.
Massive profit forecasts have helped chip makers dominate the stock market this year, but the trade has decidedly cooled down, for now. Among the concerns: additional competition from one of China's largest memory-chip makers, which announced it would roll out a new kind of DRAM chip earlier this week. The PHLX Semiconductor Index has dropped roughly 10% over the course of six consecutive down days, its longest losing streak of the year.
The tech selloff overshadowed what Wall Street had initially read as an important inflation report.
Heading into Wednesday, investors had grown increasingly confident that the Fed would pause this month after having just lifted rates in September -- its first-rate hike in three years. A series of Fed officials had encouraged that thinking in recent weeks, arguing that inflation pressures weren't severe enough to warrant a rapid string of hikes.
Wednesday's inflation print dented that confidence -- even if it still didn't spur a sea change in investors' outlook.
As expected, the data showed a big jump in gasoline prices spurred by the continuing Iran conflict. But it was increases elsewhere that were most concerning to investors since the Fed tends to focus on so-called core prices, which exclude volatile food and energy categories.
Those rose 0.3% from the previous month, above the 0.2% increase anticipated by economists surveyed by The Wall Street Journal. Inflation in services continued to be sticky. But there were also surprising increases in the prices of goods like apparel, stirring concern that high energy prices were starting to drive up inflation elsewhere by increasing transportation costs.
At one point, federal funds futures showed that traders saw the chances of a rate increase later this month rising to around 50% from around 20% before the report, according to CME Group data. But that fell back to 35% as the tech selloff took hold.
Yields on Treasurys, which move inversely to bond prices, tracked that shift in rate expectations. The yield on the 10-year note climbed as high as 5.329% before finishing the day at 5.189%, down from 5.216% Tuesday, according to Tradeweb. The 2-year yield, which is more sensitive to changes in rates, ended slightly higher on the day at 4.8%, but that was still well below its intraday high.
A combination of inflation worries and strong economic growth have sparked a steep selloff in Treasurys in recent months, pushing longer-term yields to their highest levels in more than two decades. In recent days, though, the market had started to calm a little, as investors saw the high yields as a buying opportunity.
The market's afternoon rally further suggested that investors are more eager to buy Treasurys again and still see bonds as a place to hide when stocks get especially volatile.
"A lot of this move higher in equities has been driven by tech, and on days when tech isn't driving things higher, there is a safe-haven bid for U.S. Treasury securities," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Comments