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U.S. Equities continue to get hit, Dow Jones now down more than 1,000 points

Nasdaq 100 Plunges as Fed Minutes Signal Faster Stimulus Pullback, ARKK in Free Fall

Nasdaq 100 Plunges as Fed Minutes Signal Faster Stimulus Pullback, ARKK in Free Fall

Diego Colman, Market Analyst

NASDAQ 100 OUTLOOK:

  • Nasdaq 100 plummets more than 3% as the Fed’s hawkish minutes rattle investors
  • The FOMC Minutes suggests policymakers are inclined to dial back policy support faster than initially envisioned to tackle inflationary pressures
  • Growth and speculative plays take a hit, with ARK Innovation down more than 7%

Most read: What is the Shape of the Yield Curve Signaling for Cyclical Stocks?

The U.S. equity market took a turn for the worse on Wednesday after the Federal Reserve released the minutes from its last monetary policy meeting, with growth and technology stocks leading the rout. When it was all said and done, the S&P 500 plunged 1.94% to 4,700, its lowest level since December 24. Meanwhile, the Nasdaq 100 retreated for the second day in a row, plummeting 3.12% to 15,771 as tech plays endured heavy selling amid rising yields. The Dow Jones also tracked the negative sentiment on Wall Street, but suffered only moderate losses protected by its value trait, falling 1.07% to 36,407 after briefly touching an all-time high earlier in the day.

The main bearish trigger was undoubtedly the FOMC hawkish minutes. The document revealed that policymakers believe it may be appropriate to raise the federal funds rate sooner or at a faster pace than previously envisioned amid rising inflation risks and a healthy employment outlook. Some participants also indicated that policy accommodation provided by the asset purchases program was no longer necessary in the current economic environment and that it might be suitable to begin reducing the size of the balance sheet soon after the lift-off.

After digesting the central bank’s news, investors began to anticipate a faster tightening path, assigning - according to the Fed funds futures - an 80% probability that the first interest rate increase will be delivered in March. Swift market repricing caused the U.S. Treasury curve to shift sharply higher, with the largest gains concentrated in the short end of the maturity spectrum. The 2-year yield, for example, exploded upwards, rising to 0.83%, its highest level since March last year.

Looking ahead, the Fed’s normalization process is likely to fuel elevated levels of volatility and become a significant headwind for risk assets early in 2022, especially for expensive growth-oriented stocks. Companies in this space are oftentimes unprofitable and their exorbitant valuations rest on borrowing costs remaining anchored near zero to use a smaller discount rate when modeling the present value of future cash flows.

As stimulus is withdrawn, investors may turn to value investing, shunning low-quality/high vols stocks that are sensitive to less accommodation. In general, the value factor shows resilience in the face of tighter monetary policy and performs well when GDP expands above potential, the baseline scenario for

2022. It is perhaps for this reason that the blue-chip Dow Jones has mostly held up in recent days, outperforming other averages such as the Nasdaq 100 and S&P 500.

In any case, style rotation is likely to exacerbate the recent sell-off witnessed in some corners of the market. Having said that, highly speculative plays such as ARKK or meme stocks are in great danger and present asymmetric downside potential. Focusing on ARK Innovation, Cathie Wood’s flagship fund sank more than 7% on Wednesday, reaching its lowest level since September 2020. In my top trade idea for the first quarter, first published on December 31, I commented that ARKK was in a precarious position and could fall significantly in 2022. In just the first week of the year, the ETF has plunged approximately 9%, but could still fall further in the short term as financial conditions start to tighten.

ARKK DAILY CHART

Nasdaq 100 Plunges as Fed Minutes Signal Faster Stimulus Pullback, ARKK in Free Fall

ARKK chart prepared using TradingView

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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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