The Dow and broader U.S. stock market extended their slide Friday in what appears to be a classic ‘buy the rumor, sell the fact’ scenario following the Federal Reserve’s planned rate cut earlier this week.
Dow Makes It Four Losses in a Row; S&P 500 Down Five Straight
All of Wall Street’s major indexes declined sharply on Friday, mirroring a volatile pre-market for Dow futures. The Dow Jones Industrial Average fell 138.92 points, or 0.52%, to 26,444.5, its fourth consecutive drop.
The large-cap S&P 500 Index fell for a fifth straight session, losing 0.77% to settle at 2,9230.65. Eight of 11 primary sectors contributed to the selloff, with information technology leading the pack. The $8.2 trillion sector plunged more than 1.7%.
Sliding technology shares weighed heavily on the Nasdaq Composite Index, which plunged 1.42% to 7,996.34.
The CBOE Volatility Index, commonly known as the VIX, broke 20 for the first time in two-and-a-half months. Wall Street’s preferred measure of investor anxiety jumped 12.5% to 20.11 on a scale where 20-25 represents the historic average. At last check, the VIX was up 2.97% at 18.4.
Buy the Rumor, Sell the Fact
Although conventional wisdom tells us that investors should be celebrating the Federal Reserve’s decision to lower interest rates, the market’s reaction was a classic ‘sell-the-fact’ scenario.
Stocks began their long unwind shortly after the Fed made its policy announcement Wednesday at 2:00 p.m. Following two more days of losses, the Dow is on track for its worst settlement since mid-June.
Part of the declines can be attributed to false expectations that the Fed was going to lower interest rates by 50 basis points, but it’s clear from Fed Fund futures prices that a large majority of traders were expecting only a quarter-point reduction. Besides, most traders expect the central bank to lower interest rates again in the fall.
Many analysts have called the Federal Reserve’s latest policy move as an “insurance” cut as officials look to hedge against global economic risks. That’s a stark contrast to the 2008 rate cut, which was in response to the financial crisis.