Market Plunge Sparks Volatility: December Rebound Hopes Dim Amidst Fed Rate Cut Speculation

Markets experienced extreme volatility recently, with major indices like the Dow and NASDAQ seeing significant swings. Initial optimism fueled by strong reports from NVIDIA and Walmart quickly evaporated as investor caution grew regarding potential Federal Reserve interest rate cuts in December. This, coupled with a sharp downturn in the cryptocurrency market, contributed to a broad market sell-off.

Key Takeaways

• Markets experienced significant volatility, with the Dow and NASDAQ falling sharply from daily highs.

• Investor sentiment shifted due to increased caution about a December Fed rate cut and a collapse in the crypto market.

• Despite the sell-off, the economy continues to grow, and corporate earnings remain strong.

• The tech sector, particularly AI-related stocks, faced a notable correction.

• Interest rate expectations shifted, with increased bets on a December Fed rate cut.

Market Turmoil and Sector Performance

Yesterday's trading session was marked by unprecedented volatility, with both the Dow Jones Industrial Average and the NASDAQ Composite experiencing a 1,000-point drop from their daily peaks. While the day began with gains driven by positive news from NVIDIA and Walmart, the market reversed course amid growing concerns about the Federal Reserve's stance on interest rates and a significant collapse in the cryptocurrency market.

The spikes in the VIX (volatility index) and the put/call ratio suggest a potential technical bottoming process is underway, especially in the absence of any Black Swan-level negative news. The economy continues its growth trajectory, and corporate earnings remain robust. However, even a modest correction, particularly after an extended bull market, can lead investors to re-evaluate their assumptions.

Year-to-date, only consumer staples, consumer discretionary, and real estate sectors remain in negative territory. In contrast, over the past month, healthcare and energy have been the only sectors showing gains. This morning, the technology sector continued its decline, with some characterizing it as the popping of an "AI bubble."

The Magnificent 7 stocks, a group of prominent technology companies, have seen a decline of 2.2% over the past week and 3.1% over the month, though they still hold a 16.1% gain year-to-date.

NVIDIA and the AI Correction

NVIDIA (NVDA) has become a focal point of the AI-driven correction, falling $20 from its recent high following strong earnings and guidance. Despite this, NVIDIA remains up 30.4% year-to-date. Its correction has also impacted the broader semiconductor sector, which is down 2% today and 6.9% this week, but still boasts a 31.5% year-to-date gain.

An outlier in the tech space is Alphabet (GOOG), which saw a 1.6% increase today and a 17.2% rise over the month (+55.3% YTD). This performance is attributed to several positive announcements and the company's development of its own AI chips.

Cryptocurrency Market Collapse

The cryptocurrency market, known for its inherent volatility, is experiencing its most severe downturn since 2022. Bitcoin has fallen 14.3% in the past week and 25.7% in the last month, marking a 34.3% decrease from its all-time high on October 6th. This significant correction, often seen as an indicator of risk sentiment, is forcing liquidations among dealers and triggering sell-offs in various altcoins.

Shifting Interest Rate Expectations

The recent stock market sell-off has led to a decrease in interest rates, contrary to previous Federal Reserve commentary suggesting a December rate cut was unlikely. Today, market bets on a December rate cut surged to 69%, with a 28% probability assigned to a second cut in January. This shift indicates increasing political pressure on the Fed.

The US 2-year Treasury yield fell 5 basis points to 3.51%, reaching its lowest point in November. The 10-year Treasury yield also dropped 4 basis points to 4.06%, its lowest for the month. Concurrently, the US dollar index climbed to 100.3, its highest level since May.

Economic Indicators and Commodities

While official government economic data remains delayed, S&P Global data released today indicated continued economic growth. Additionally, Michigan consumer surveys showed improved sentiment and lower inflation expectations.

On the commodities front, gold prices saw a modest increase, while silver declined by 2%. Copper is trading just below $5. Crude oil fell 2.4% to $57.5 per barrel, hitting its lowest point of the year. Natural gas, however, rose 2.7% to $4.6 per million British thermal units, a three-year high.

Outlook for December

Following yesterday's market action, pinpointing an exact bottom for the current correction remains challenging. However, if the increased market expectations for a December Fed rate cut materialize, a significant rebound in December could be anticipated.

Sources

• Volatility Surges as Markets Slide: Is a December Rebound Still on the Table?, Investing.com.