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Markets Shake Out on December Fed Minutes

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Hump Day stock markets were smooth sailing earlier in the day, bolstered by nice private-sector employment tailwinds from ADP (ADP - Free Report) this morning… until they hit an iceberg known as the Fed Minutes from the most recent FOMC meeting last month. All major indexes came crashing down in the final hour of trading: the Dow fell -392 points, -1.07%; the S&P 500 -93 points, -1.94%; the Nasdaq -522 points, -3.34%; and the small-cap Russell 2000 -75 points, -3.30%.

Within these Fed minutes which troubled the markets so, we saw additional hawkishness in areas little reported at the time of the Fed’s initial release December 15th. These include a focus on winding down the $9 trillion balance sheet the $120 billion in asset purchases per month since the start of the pandemic had helped run up.

Everyone back then was focused on Fed Chair Powell’s mention that there was no necessary correlation between taking the asset purchases tapered to zero and immediately rising interest rates thereafter.

In fact, Powell explicitly said he wanted “maximum employment” having been achieved first, and we had just seen a disappointing jobs report two weeks prior. So within the hawkish tone of increasing the taper from $15 billion per month to $30 billion per, there looked to be a silver lining of dovishness regarding rate hikes coming later. Markets went up on the news.

What we didn’t know was that the Fed also discussed a tightening of the balance sheet, which is a clear move toward overall tightening of monetary policy. Basically, once bonds mature they don’t get replaced, which in this case will take down some of that huge $9 trillion sitting there.

As a result, the 10-year Treasury yield cranked up and closed a hair below 1.7%. Meanwhile, investors took a lot of air out of equities today, especially in big tech growth names, which is why we see the Nasdaq faring worst on this big sell-off. The 2-year notched its highest levels in 22 months, pushing through 80 basis points to finish at +0.83% on the day.

In fact, it’s the worst single trading day on the Nasdaq since February of last year, settling in at 15,100 at the close. For the S&P, it’s the worst since November, with all 11 sectors finishing in the red by the close — right on 4700 exactly. For the Russell 2000, it now sits 10% off its all-time highs set in early November. As far as shakeouts go, it’s a pretty meaningful one; even big names like Microsoft (MSFT - Free Report) and NVIDIA (NVDA - Free Report) off -3.8% and -5.8% on the day, respectively.

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