Why did US stock markets fall on Wednesday (27 January)?

The “buy everything” trade is being taken down a notch, as multiple asset classes stumbled mid-week.

Even as the outrageous battle between day traders and short sellers rages on (Gamestop’s share price soared another 135%), the S&P 500 fell 2.57 percent on Wednesday, its biggest single-day drop since October, as the benchmark index wiped out its year-to-date gains.

Spot Gold is now trading back below its 200-day simple moving average, and even Bitcoin extended its descent towards the psychologically-important $30,000 mark after shedding over a quarter of its value from its all-time high.

With the VIX index, also known as Wall Street’s “fear” gauge, now at its highest since end-October, US stock futures are also pointing to further losses at Thursday’s open.

Fed plays down tapering talk

Fed chair Jerome Powell’s warning that the US economy is still “a long way from a full recovery” may have dampened some of the optimism baked into risk assets. Powell’s efforts to nullify concerns over an inflation overshoot, which would’ve likely hastened the Fed’s tapering, also may have contributed to fund flows back into US Treasuries at the expense of riskier assets.

This paring back of risk exposure saw market participants returning to the safety of US Treasuries and the Dollar.

Yesterday, the 10-year US Treasury yields dipped and touched the one percent line for the first time since 6 January, before bouncing off that psychologically-important mark. They still remain some 16 basis points off their January high.

Meanwhile, the Dollar index (DXY) is now rising to test its 50-day moving average as a resistance level.

F.A.T. disappointment

The Wednesday selloff in the S&P 500 was led by declines in the IT sector, and losses for these tech behemoths extended into postmarket trading as Big Tech signaled a cautious outlook. Note that markets had already been concerned about overstretched valuations in the lead up to the current earnings season.

• Facebook beat analyst estimates in its revenue and net income for Q4. Yet, the social media giant warned that it continues to face “significant uncertainty”, while citing the risk of heightened regulations in Europe and the high-base effect eroding year-on-year comparisons in the second half of 2021.

  Facebook’s share price tumbled by as much as 7.9% in postmarket trading, having shed 3.5% during the regular session.

• Despite Apple posting a record high for its quarterly revenue ($111.4 billion), the fact that company executives were reluctant to offer any guidance was enough to turn off some shareholders.

  Apple’s share price fell by more than 3% in extended trading, after declining 0.77% during Wednesday’s session.

• Tesla disappointed investors with lower-than-expected figures for its top and bottom lines in Q4, even as the EV maker posted its maiden full-year profit while delivering nearly half a million cars.

  ​Despite outlining a bullish outlook, stating that it hopes to beat 2020’s growth rate of 50% (which could translate into 750,000 units delivered in 2021), Tesla’s share prices still dropped by as much as 7.6 percent in late trading, having lost 2.14% during the Wednesday session.

Setback for risk assets likely temporary

The overall narrative for stock bulls hasn’t materially shifted, considering the prospects for more incoming US fiscal stimulus (albeit potentially delayed till mid-March), Powell’s reiteration of the Fed’s ultra-accommodative stance, and the vaccine-enabled US economic recovery.

Still, this cooling-off period may serve risk assets well, and potentially set them up for further gains down the line.