Nasdaq books worst day in 11 months, S&P 500 skids 1.9% after Fed minutes surprise with talk of shrinking balance sheet

Minutes revealed robust talk among some Fed officials around the central bank potentially moving to raise rates quicker and cutting its current $8.8 trillion sized balance sheet faster than earlier anticipated to help tackle higher costs of living.

Read: Fed minutes suggest officials are primed to move away from easy policy stance

The market reaction to talk of faster-paced steps toward policy normalization surprised some on Wall Street. “It was maybe confirming what people had worried about previously, and now it’s out there in black and white, on paper, for everyone to see,” said John Carey, director for equity income at Amundi U.S., by phone.

“You can’t doubt it’s going to happen at this point. That reality is sinking in.”

See: Here’s what stock and bond market strategists say after Fed minutes point to the end of easy money

At the Dec. 14-15 meeting, Fed policy makers agreed to speed the wind-down of the central bank’s monthly asset purchases.

But Carey also expects the Fed to remain cautious about tightening monetary policy too much during its battle with inflation, particularly if the surge in COVID-19 infections hampers the economy, with some school districts hitting pause on in-person classes and difficulties emerging for planned industry conferences and other events major events, including the Grammy Awards, nearly two years into the pandemic.

“The problem could be resolved if the economy slows with omicron,” Carey said of inflation pressures.

Meanwhile, the minutes of the Fed meeting hastened a wreck in technology-related sectors SP500.45, -3.13% already gathering momentum on Wednesday. Shares of Google parent Alphabet Inc. GOOGL, -4.59% closed down 4.6%, off more than 7.6% from its Nov. 18 closing high of $2,996.77.

A rise in government bond yields also contributed to pressure on tech plays, as investors factored in the prospect of the higher borrowing costs if the Fed lifts interest rates as many as the three times as anticipated this year.

On the other hand, financials SP500.40, -1.25%, which benefit from a rising rate environment, still were headed solidly higher for the week.

The 10-year Treasury yield TMUBMUSD10Y, 1.706% has surged nearly 20 basis points in the first three trading days of 2021.

“I think many investors are coming to the realization that this is not the time to stick your neck out,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, in a phone interview.

He pointed to the “repricing of higher valuation stocks” in recent days and continued selling Wednesday in the technology sector. “At some point, though, I think tech investors will be going in to defend some of these names, but we are not at that point yet,” he said.

Over the past two trading sessions, the S&P 500 Value Index SP500PV, -0.56% has outperformed the S&P 500 Growth Index SP500PG, -3.81% by 4.31 percentage points, marking the largest two-day outperformance since Nov. 10, 2020.

On the economic and policy fronts, a report on private payrolls showed that 807,000 jobs were created in December, according to the ADP National Employment Report, higher than forecast for a gain of 375,000, based on average estimates from economists surveyed by The Wall Street Journal.

“Jobs, jobs, jobs. Today through Friday, Wall Street will be obsessed with jobs reports and their likely influence of inflation and interest rates,” wrote Sam Stovall, chief investment strategist at CFRA Research, in emailed comments.

Strategists use the ADP report to get an early read on the Labor Department’s report on private payrolls, which are scheduled to be released in about 48 hours. The private-sector report recently hasn’t been an accurate predictor of the Friday jobs report.

However, the ADP report is watched because investors will be more attuned to the health of the jobs market during the omicron variant surge. The labor market and the outlook for inflation are two factors that policy makers at the Fed will be observing closely as they set up for the new year.

Separately, the final reading of the IHS Markit services purchasing managers index for December came in at 57.6, down from 58 in November but mostly in line from an earlier estimate.

Which companies were in focus?

• The highflying automotive sector was in the spotlight, after rallies for Tesla TSLA and Ford Motor Co. F on successive days. General Motors GM unveiled an all-electric Chevy Silverado on Wednesday, while Sony SONY rallied in Tokyo trade after setting up an electric vehicle unit. But shares of GM closed down 4.6%, Ford fell 2.7% after a big run-up on Tuesday and Tesla’s stock shed 5.4% as Wall Street swooned in late afternoon trade.
• Shares of Beyond Meat BYND, -5.08%  were in focus after its said a plant-based fried chicken product is coming to U.S. KFC locations next week. Its stock fell 5.1%.
• Boeing Co. shares BA, -0.26% lost 0.3% even as the airline industry ordered the aeronautics company’s 737 MAX jet. On Wednesday, the Allegiant Travel ALGT, -8.83% airline, Allegiant Air, ordered 50 MAX jets with an option to purchase 50 more.

How did other assets fare?

• The yield on the 10-year Treasury note TMUBMUSD10Y rose 3.7 basis point to 1.703%, the highest since April 5, 2021. Yields and debt prices move opposite each other.
• The ICE U.S. Dollar Index DXY was off 0.1%.
• Gold futures GC00 closed higher, with the February contract rising 0.6% to settle at $1,825.10 an ounce on Comex, but retreated after the Fed minutes. West Texas Intermediate crude for February delivery CLG22, the U.S. benchmark, rose 1.1%, to settle at $77.85 a barrel on the New York Mercantile Exchange.
• Bitcoin BTCUSD fell 5%.
• The Stoxx Europe 600 SXXP index closed up less than 0.1%, while London’s FTSE 100 UKX ended its session up 0.2%.
• The Shanghai Composite SHCOMP declined 1% and China’s CSI 300 000300, -1.01% fell 1%, while the Hang Seng Index HSI declined 1.6% in Hong Kong and Japan’s Nikkei 225 NIK edged up 0.1%.

—Steve Goldstein contributed to this article