Wall Street staggers with ‘vicious’ $1.8 trillion stock rout

NEW YORK (AFP, BLOOMBERG ) - Wall Street stocks suffered bruising losses on Thursday (May 5) in a broad-based sell-off on fears the US central bank will struggle to fight high inflation amid the the threat of a recession.

The Dow Jones Industrial Average plunged more than 1,000 points, or 3.1 per cent, to 32,997.97, its worst day since June 2020.

The broad-based S&P 500 lost 3.6 per cent, erasing about US$1.3 trillion (S$1.8 trillion) of market value, while the tech-heavy Nasdaq 100 dropped 5.1 per cent, the most since September 2020. 

The losses were a dramatic reversal from Wednesday, when stocks rallied after the Federal Reserve announced a half-point interest rate increase as expected, but ruled out a three-quarter point increase.

While Wednesday’s outcome was not as hawkish as feared, the Fed’s announcement still embodies “one of the most aggressive tightening cycles that we have seen in decades,” said Angelo Kourkafas, investment strategist at Edward Jones.

“It didn’t necessarily change the narrative that economic growth is slowing, while the Fed will tighten monetary policy at the at the fast pace,” Kourkafas said.

All 11 sectors of the S&P 500 were in the red, with several of the biggest US corporations experiencing hefty pullbacks. This included Amazon, down 7.6 per cent, Tesla, down 8.3 per cent and Facebook parent Meta, down 6.8 per cent.

Speculative corners of the market were among the hardest hit, with an index of expensive software stocks sliding more than 10 per cent, the most since mid-March 2020. An ETF tracking newly public companies lost 7.6 per cent, while non-profitable tech firms lost roughly 11 per cent, as Bitcoin - the largest cryptocurrency - dropped by the same amount to just above US$36,000. 

“There’s still a lot of fear out there,” said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading. “People thought yesterday was the green light, but now they’re getting caught again. 

“The only thing that will lead to a sustained turnaround is if we see inflation start to not look so hot,” he added. “Any rally that isn’t on improving inflation is a sucker’s rally.”

Frank Davis, senior managing director at LEK Securities, said: “It looks like some people might have viewed yesterday’s rally as a good exit, and then it just started feeding on itself this morning. The market did need to pull back and re-calibrate for value, but the viciousness of the move is really the story of the day.”

Chris Gaffney, president of world markets at TIAA Bank, said: “When Powell said he wasn’t going to tighten 75, that’s what led to that relief rally. But they’re still tightening, and they’re still tightening at a more aggressive pace than most would have imagined just a short while ago. So it is difficult to buy into the rallies.

“Overall financial conditions are going to be tighter moving forward and certainly the risk of a recession, the risk of tighter financial conditions leading to a recession is still there. So it’s very difficult to jump on any sort of rally under these conditions.”

Cliff Hodge, chief investment officer at Cornerstone Wealth, said: “Investors are getting spooked by the combination of soaring unit labour costs and a significant drop in productivity. Those are some stagflationary-like readings.”