Markets Now Down
What started as a selloff in tech stocks has become a general market rout as risk-averse investors dial back their equity holdings.
All three major U.S. indexes were solidly in the red. The Dow Jones Industrial Average has dropped 496.49 points, or 1.4%, while the S&P 500 has fallen 1.5%, and the tech-heavy Nasdaq Composite has declined 1.6%. While tech stocks had been leading the way down, Tuesday’s drop is characterized by more general weakness, with almost 90% of S&P 500 components trading lower, according to FactSet.
Here are three reasons the stock market is falling:
Inflation fears. Everyone is suddenly concerned about inflation. Recent economic data show that companies are paying higher prices for their raw materials due to supply shortages, and are raising prices to cover the higher costs. Can you say inflation? If inflation is real, the Federal Reserve could be forced to raise interest rates sooner than anticipated—or at a faster pace once they start hiking, according to former New York Fed President Bill Dudley. Higher rates, generally, are worse for growth stocks, because it raises the “discount rate” used to value their stock, and decreases the value of their future cash flows. “If supply disruptions persist and demand remains firm, the Fed might need to tighten monetary policy faster than expected,” writes Dennis DeBusschere, head of portfolio strategy research at Evercore. “That theory seems to be driving market volatility higher and tech stocks lower.”
It’s not just tech stocks. If recent weakness had been primarily in tech stocks, today’s is broad based. That points to a second problem caused by inflation, DeBusschere notes: That rising prices will mean consumers have fewer discretionary dollars to spend, and that means growth will be slower, something that would hurt economically sensitive value stocks more than growth stocks. It’s one reason the Dow might be down more than the Nasdaq today, though the fact that the Nasdaq has sold off more recently is also a factor.
Investor sentiment. After a period of extreme bullishness, investors have been feeling less confident about stocks. Data from the American Association of Individual Investors show the percentage of bulls minus bears is at 24 percentage points, down from 30 points two weeks ago. That 30-point level is important. It’s fairly rare, and when it’s triggered, the S&P 500 has been roughly flat over the following three months, on average, and up just 1% for over the following year, according to RBC Capital Markets data.
Write to Jacob Sonenshine at [email protected]
