There has been a broad Wall Street selloff across bonds and stocks in response to the Federal Reserve’s rate hikes to combat inflation. U.S. Treasury bonds, the NASDAQ 100, and the S&P 500 have all seen sharp declines.
Energy and materials, however, have been the exception, with big gains in recent trading sessions. But that trade may be at risk, too, judging from the market's recent response.
Still, the simultaneous decline in both stocks and bonds in such a short time could have a devastating impact on some investors. For instance, investors who held $1 million in U.S. Treasuries at the beginning of the year in their retirement account now hold roughly $770,000, which could spoil their retirement plans. They may have to work longer to make up for the shortfall in their portfolio, which may not be harmful in today's labor shortage in the economy.
The trouble is that the economy won't stay in a labor shortage if markets continue to fall at this pace. It will eventually move into a recession, and jobs will be hard to find once again.
"What has been lost or made in the markets depends upon your entry point. It also depends upon the kinds of stocks that are being considered," Robert R. Johnson, a business professor at Creighton University, told International Business Times. "In essence, the stock market is a market of diverse stocks. With all the liquidity infused into the markets, stocks with no earnings (and quite frankly, unsustainable business models) were driven to atmospheric valuations -- witness the carnage in Cathie Wood's ARRK Innovation Fund and contrast that to Warren Buffett's Berkshire Hathaway. What we are seeing now is a focus on earnings and fundamentals.”
What's behind the Wall Street selloff? Several things.
Top on the list is inflation, which is running at a 30-year high. It has been driving bond prices lower and yields higher as investors demand a premium to compensate them for losing the purchasing power of the money they invest in bonds.
Then there's the Fed's announcement that it will begin to liquidate its portfolio of Treasury Bonds and mortgage-backed securities, beginning in early June, which has added selling pressure to the bond market.
Meanwhile, there is anxiety over the lingering war in Ukraine, adding to selling pressure on the shares of companies with significant global exposure.
And there's anxiety over the continued lockdowns in China, which have slowed down growth in the world's second-largest economy. It's beginning to catch up with the two sectors of Wall Street that have been doing well, energy and materials.
In addition, with the opening trade over, Wall Street seems to be running out of investment themes, as evidenced by the selloff in leisure and traveling shares last week.
And there’s the exit from “crowded trades,” areas of the market where investors have piled funds during the bull market, and now are trying to get out at the same time, exacerbating the market selloff. For instance, the selloffs last Thursday and Friday were concentrated on large-cap stocks, which are part of major indexes, like Amazon, Microsoft, Facebook, and Netflix.
