The end points of a stimulus fueled market are being defined.
Why is this important: The conditions that led to excessive pricing of riskier assets are being phased out, and sharp market swings like those seen today are inevitable as investors try to adjust to the new landscape.
Catch up fast: After a massive and deep sell off earlier in the day, all three major averages rallied to close higher.
- The S&P briefly entered correction territory (defined as being more than 10% off its record close at the start of the month).
The big picture: Investors continue to shuffle bets as they assess new market conditions with less government intervention.
Today’s trades were triggered by crashes in unprofitable and speculative tech companies, meme stocks, SPACs and cryptos, Jay Hatfield, chief investment officer at Infrastructure Capital Management, told Axios.
- This then dragged lower-risk, more profitable tech companies like Apple and Amazon down, sending the S&P plummeting, which then prompted investors to sell more shares, he adds.
- The market rebounded strongly, in part when hedge funds like his began to cover their short positions, Hatfield says.
By the numbers: Recent SPAC companies like satellite launcher Virgin Orbit (-17.9%) and electric vehicle maker Arrival (-9.4%) were among the day’s biggest losers, along with WeWork (-9, 8%) and GameStop (-5.9%).
What to watch: If the Fed signals it will take a slower approach to quantitative easing when it meets Tuesday and Wednesday.
- “You definitely don’t want to be in the market when the Fed [is taking liquidity out] aggressively,” Hatfield says.
The bottom line: Bets that made sense when the Fed started to intervene may not make sense now.