Wall Street has its worst day in a month as traders dial back expectations for Fed rate cuts

By John Towfighi, CNN

New York (CNN) — US stocks closed sharply lower Thursday as investors sold shares in technology companies and volatility picked up on Wall Street.

The Dow fell 798 points, or 1.65%. The broader S&P 500 fell 1.66% and the tech-heavy Nasdaq Composite slid 2.29%.

Investors also assessed how long it might take for economic data releases to be rebooted after the end of the government shutdown.

The House on Wednesday evening approved a funding measure that had been passed by the Senate. The bill was signed by President Donald Trump in the late evening, officially ending the longest US government shutdown in history.

Now Wall Street is focused on the backlog of government data that was delayed because of the shutdown — and how it might impact the Federal Reserve’s outlook for the economy.

“Lacking fresh economic data, markets have become increasingly jittery in recent weeks,” Seema Shah, chief global strategist at Principal Asset Management, said in a note. “Now, as the government shutdown ends, each long-awaited data release or policy announcement will have the potential to move markets dramatically.”

The Dow, S&P and Nasdaq each had their worst day since October 10, when a flare up in US-China trade tensions sent stocks lower.

CNN’s Fear and Greed index moved from “fear” into “extreme fear.” Wall Street’s fear gauge, the VIX, jumped 18% as volatility picked up.

“The gears of the government should be working again soon, and while that is a relief for markets and the economy, there is still plenty of uncertainty, particularly around the missed inflation and jobs data and how these fronts have been faring,” Carol Schleif, chief market strategist at BMO Private Wealth, said in an email.

Traders on Thursday were pricing in roughly a 52% chance the Fed cuts rates in December, according to CME FedWatch. That’s down from a 63% chance on Wednesday and a 96% chance one month ago.

“The data blackout has made the Federal Reserve’s job difficult, but we still expect them to cut interest rates again in December,” Schleif said. “We expect markets to grind higher — though likely with continued volatility.”

The sell-off in stocks worsened in the afternoon. The third-quarter earnings season is also winding down, meaning there are fewer fundamental catalysts, and markets are more susceptible to moves based on investor sentiment.

Tech woes continue

Tech stocks have come under pressure in recent weeks as investors have voiced concerns about relatively expensive valuations. There has been rising skepticism about whether AI companies will be able to produce enough profits to justify the enormous amounts of spending taking place.

Tesla shares (TSLA) fell 6.6%. Palantir shares (PLTR) fell 6.5%, and Nvidia shares (NVDA) fell 3.6%. Oracle shares (ORCL) fell 4.15%.

“Investors are reevaluating the prices they’re paying for big tech and AI stocks,” said Ross Mayfield, an investment strategist at Baird.

After a strong tech rally in recent months, investors have been taking profits and rotating into sectors that have lagged behind and look relatively affordable.

The Nasdaq has dropped nearly 5% since closing at a record high on October 29. The tech-heavy index has shed almost $2 trillion in market value across that time period.

Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, said he recently trimmed some of his exposure to tech.

“It just had such a monstrous run that it just made sense to take the profits and find other opportunities,” Samana said.

The Dow’s Thursday decline comes after back-to-back days of record highs. The blue-chip index closed above 48,000 points for the first time ever on Wednesday as investors moved into sectors including financials and health care.

Walt Disney shares (DIS) fell 7.8% on Thursday after the company reported earnings that did not impress Wall Street.

Elsewhere, bitcoin fell roughly 3.3% on Thursday and traded around $98,250. The cryptocurrency has struggled to regain ground since tumbling in recent weeks. Bitcoin hit an all-time high above $126,000 in early October.

Fed back in focus

Investors are trying to discern the Federal Reserve’s outlook for the economy ahead of the central bank’s policy meeting in December.

The Fed’s rate cuts in September and October helped provide a tailwind for stocks. Investors could get spooked if central bankers hold rates steady in December due to delayed data and a cloudy view of the economy.

“If sticky inflation forces the Fed to maintain restrictive policy, the cost of capital remains a headwind for valuations,” David Miller, CIO at Catalyst Funds, said in an email.

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