US stocks have recorded their largest single-day fall in a month. What happened?

Author: Wall Street News

The brief optimism brought about by the end of the U.S. government shutdown quickly dissipated, with market focus shifting to a large amount of delayed economic data, uncertainties regarding the Federal Reserve's interest rate cuts, and concerns over overvalued tech stocks, leading to widespread sell-offs of overvalued tech stocks and risk assets.

On Thursday, October 13, the three major U.S. stock indexes collectively fell during the trading session, with the tech-heavy Nasdaq Composite Index closing down 2.29%.

The worsening risk sentiment has also spread to the cryptocurrency market, with Bitcoin falling below the $100,000 mark and Ethereum briefly dropping over 10%.

The direct catalyst for this sell-off was the cautious remarks made by several Federal Reserve officials, suggesting that interest rate cuts should be approached with caution. According to data from CME, the interest rate futures market shows that the probability of a rate cut has plummeted from over 70% a week ago to around 50%.

This shift has intensified the market rotation that has been underway since the beginning of the month. Reports indicate that investors are locking in profits from this year's hottest stocks and are instead moving towards lower-valued, more defensive sectors, a “risk-off mode” that was vividly demonstrated in Thursday's trading.

U.S. stocks posted their largest single-day drop in a month.

The U.S. government shutdown has ended, the release of economic data has been postponed, and investors are reassessing the prospects of a Federal Reserve rate cut in December, leading to the largest single-day drop in U.S. stocks in a month on Thursday.

U.S. stock market benchmark index:

The S&P 500 index closed down 113.43 points, a decrease of 1.66%, at 6737.49 points.

The Dow Jones Industrial Average closed down 797.60 points, a decrease of 1.65%, at 47457.22 points, moving away from its historic closing high.

The Nasdaq Composite fell by 536.102 points, a decrease of 2.29%, closing at 22870.355 points. The Nasdaq 100 Index fell by 536.102 points, a decrease of 2.05%, closing at 24993.463 points.

The Russell 2000 Index closed down 2.77%, at 2382.984 points.

The panic index VIX rose by 14.33%, closing at 20.02. At 04:23 Beijing time, it peaked at 21.31 before retreating from its gains.

The Seven Tech Giants:

The Magnificent 7 index of the seven major U.S. tech stocks fell by 2.26%, closing at 203.76 points.

Tesla closed down 6.64%, Nvidia fell 3.58%, Google A dropped 2.84%, Amazon declined 2.71%, Microsoft fell 1.54%, while Meta closed up 0.14%.

Chip stocks:

The Philadelphia Semiconductor Index closed down 3.72%, at 6818.736 points.

AMD fell 4.22%, TSMC fell 2.90%.

Oracle bone script fell by 4.15%, Broadcom fell by 4.29%, Qualcomm fell by 1.23%.

Multiple Federal Reserve officials have made hawkish comments, and the “moderates” are beginning to waver.

Multiple Federal Reserve officials have made hawkish comments, expressing concern about inflation and taking a cautious stance on future interest rate cuts.

Among them, Cleveland Fed President Hammack (2026 FOMC voting member) stated that inflation is expected to remain above the 2% target in the next 2-3 years. With the weakening job market, the Fed's employment goal (i.e., the employment aspect of its dual mandate) is facing challenges. Tariffs are expected to drive up inflation and continue into early next year. The Fed needs to maintain a certain degree of policy restrictiveness in order to cool inflation.

Minneapolis Federal Reserve President Neel Kashkari said on Thursday that he opposes last month's interest rate cut due to the resilience of the economy and is taking a wait-and-see approach regarding the decision in December. St. Louis Federal Reserve President Alberto Musalem also reiterated that he believes monetary policy needs to “hold up” against inflation.

Due to concerns about inflation and the belief of some officials that the labor market remains strong, an increasing number of decision-makers are showing hesitation towards further easing of monetary policy, including some who were previously staunch supporters.

The latest update is that Boston Fed President Susan Collins and San Francisco Fed President Mary Daly—two officials who have both voted in favor of rate cuts this year—have issued the clearest cautious signals to date. Collins stated that the “threshold for further easing in policy is relatively high” at this time, while Daly remarked that it is too early to draw conclusions about the December decision, and she maintains an “open mind.”

The upcoming massive data (which may bring more rather than less uncertainty), combined with recent intensive hawkish statements from officials, has pushed the market's bets on a rate cut in December back below 50%.

Two possibilities for the December meeting

Looking ahead to the December meeting, the outcome seems to be leaning towards “two options”: either keeping interest rates unchanged or cutting rates by another 25 basis points. According to Wall Street Journal reporter Nick Timiraos, another possibility is that the Federal Reserve may lower rates in December while setting a higher threshold for future easing policies through guidance.

"Regardless of the final decision, Powell may face more dissenting votes than at the October meeting (where there were two dissenters). Krishna Guha, Vice Chairman of Evercore ISI, wrote in a report on Thursday that Collins' clear opposition to a rate cut in December “intensified our concerns about Powell's ability to manage the internal divisions within the FOMC.”

Guha analysis suggests that if the Federal Reserve decides to cut interest rates, Kansas City Fed President Jeffrey Schmid may receive support from Collins and Musalem; if the Federal Reserve decides to hold steady, then the previously advocating for a larger rate cut, Governor Stephen Miran, may vote against alongside fellow advocates of easing, Governors Christopher Waller and Michelle Bowman.

This further highlights the deep rifts within the committee, making the decisions in December full of uncertainties.