The brief optimism following the end of the U.S. government shutdown quickly faded, with market focus shifting to delayed economic data, uncertainty around Federal Reserve rate cuts, and concerns over high-valuation tech stocks, triggering a broad sell-off in risk assets.
On Thursday, October 13, investors accelerated selling momentum stocks that had surged this year, pivoting to safer assets and driving down risk asset prices. U.S. stocks posted their largest single-day drop in a month.
All three major U.S. stock indices declined, with the tech-heavy Nasdaq Composite plunging 2.29%. Tech giants broadly retreated, with Tesla closing down 6.64% and Nvidia falling 3.58%. The risk-off sentiment spilled into cryptocurrencies, with Bitcoin dropping below $100,000 and Ethereum briefly sliding over 10%.
The immediate catalyst for the sell-off was cautious commentary from multiple Fed officials, signaling prudence on rate cuts. According to CME data, rate futures now imply a 50% chance of a December cut, down sharply from over 70% a week earlier.
This shift intensified the market rotation already underway this month. Investors are taking profits from this year's hottest performers and shifting to lower-valuation, defensive sectors—a "risk-off mode" that played out clearly in Thursday's trading.
**Momentum and AI Darlings Hit Hard as Rotation Accelerates: Funds Flow to Consumer Staples, Healthcare** With rate outlooks clouded, this year's high-flying momentum and AI-related stocks bore the brunt of selling. A Bank of America-tracked basket of high-momentum stocks fell 4.7%, its worst day since April. AI-linked names suffered particularly, with Nvidia down 3.58% and Broadcom off 4.29%. Retail favorites weren't spared either, with Citigroup's retail investor basket plunging 6%.
Over the past three days, the "Mag7" stocks underperformed other S&P 500 components significantly. Nvidia, which has largely consolidated over the past four months as investors digest AI-related news, is set to report earnings on November 19.
ARK Innovation ETF and VanEck Social Sentiment ETF both dropped over 5%, while a Goldman Sachs basket tracking heavily shorted large-cap stocks fell 5.5%, showing the sell-off's breadth.
As money exits big tech, rotation is accelerating into healthcare and consumer staples. Goldman's trading desk noted hedge funds are using healthcare to hedge AI-related risks. The Health Care Select Sector SPDR Fund (XLV) rose for a ninth straight session, outperforming all sectors except energy. While hedge funds are buying, long-term investors haven't followed yet.
Siebert Financial CIO Mark Malek observed: "People remain invested in equities but are rotating from high-growth, expensive names to what they see as safer, cheaper alternatives." Despite long-term optimism on AI, near-term valuation concerns are prompting profit-taking.
**Rate-Cut Expectations Shaken as Fed Officials Turn Hawkish** The market's reassessment of rate paths drove the sell-off. Swap traders now price just a 50% chance of a December cut, down from 72% a week ago.
Recent Fed commentary reinforced caution. St. Louis Fed President Alberto Musalem stressed prudence given inflation remains above target. Minneapolis Fed President Neel Kashkari said he didn't support the last cut and remains undecided on December's move. Cleveland Fed's Beth Hammack noted policy should stay "somewhat restrictive."
Miller Tabak's Matt Maley noted: "The promise of lower rates let investors overlook high valuations. Now that promise looks shaky, they're cutting exposure." JonesTrading's Michael O’Rourke added that if rates don't fall as expected, P/E multiples may contract, triggering selling.
**Data Deluge Looms, Markets Brace** Post-shutdown, markets face another uncertainty: a flood of delayed economic data. Investors fear this could spark volatility and upend decisions made with incomplete information. Schroders' Mina Krishnan said: "We've been in the dark for 40 days—now we'll get everything at once."
Though a temporary funding bill passed, questions remain about whether key reports—especially October jobs data—will be fully released. These figures are critical for the Fed's labor market and inflation assessment, directly impacting rate decisions and keeping investors on edge.
