(Bloomberg) -- The selloff in US equities accelerated Monday, with major averages tumbling to their worst day this year, as investors braced for a slowdown in the Amerian economy.
The tech-heavy Nasdaq 100 Index plunged 3.8% for its worst day since October 2022. The S&P 500 Index sank 2.7%, teetering closer to a correction after sliding 8.6% from its Feb. 19 peak.
The broader index closed below its 200-day moving average for the first time since November 2023, snapping a streak of 336 sessions above the closely watched threshhold. Its fall of 5% from its high in just nine sessions was the swiftest decline of that magnitude since February 2020, as the pandemic was starting to kick in.
Wall Street is on edge because President Donald Trump has warned that Americans may feel a “little disturbance” from the trade wars with Canada, Mexico and China, offering no word on when they’ll see the benefits from his tariff fights. And he has refused to rule out the possibility of a recession.
Strategists and economists across Wall Street have also been raising their odds for a US economic downturn. And that’s setting up the US stock market for what could be a prolonged bout of turbulence.
“Bad things happen below the 200-day moving average,” said Andrew Thrasher, technical analyst and portfolio manager at Financial Enhancement Group. “If there are two days of back-to-back closes below that, it would signal a shift in the upward trend in the S&P 500.”
The turbulence on Monday was widespread. Megacap tech companies in the S&P 500 sank 5.4%. Tesla Inc. plunged 15%, its worst day since September 2020. Shares in profitless technology firms were in free fall, while a Goldman Sachs Group Inc. basket of the most-shorted stocks tumbled 4.6%.
Of course, there’s a counterintuitive school of thought that says when sentiment and positioning get this bad, that clears the way for a short-term snapback. Equity positioning was cut to the bone on consensus expectations for more losses.
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As stocks keep falling, bulls have been forced to cave. But because of that, equity positioning is now slightly underweight for the first time since the unwinding of the yen carry trade rattled markets in early August, data compiled by Deutsche Bank AG show. That would seem to argue that support buying could step in before long.
Still, the calculus isn’t so simple. Investors face geopolitical risks, rising volatility and elevated inflation, underscoring expectations that the Federal Reserve is poised to keep interest rates higher than thought a few months ago. A full decline to the bottom of its historical range, like what happened during the trade war in 2018-2019, may drag the S&P 500 even lower to 5,300, according to Deutsche Bank strategist Parag Thatte. It currently is trading at around 5,650.
In light of the unprecedented uncertainty around the federal government’s trade and economic policies, Andrew Tyler, head of global market intelligence at JPMorgan Chase & Co., warns that it’s unwise to buy into any short-term rally.
“We do think a rebound is more likely then another immediate decline,” Tyler wrote in a note to clients on Monday. “While the market took solace in Powell’s commentary, more tariffs are coming and we do not believe that the market can look through these tariffs scheduled for April 2, which may include a global tariff.”
Hedge funds have been unwinding their positions aggressively, with the long-short stock ratio falling to the lowest since 2019, according to Goldman Sachs Group Inc.’s prime brokerage report for the week ended on March 7. And more bears have emerged on Wall Street, with Morgan Stanley’s Michael Wilson the latest to sound the alarm on economic growth worries.
Sell-side firms are cutting their exposure to US stocks. On Monday, HSBC Holdings Plc downgraded the US to neutral while upgrading Europe (minus the U.K.) to overweight from underweight. On Thursday, Tim Hayes, chief global investment strategist at Ned Davis Research, who correctly called the current bull run in global stocks, downgraded his position on US stocks to market weight, from overweight.
That said, conditions are nearing oversold levels, with the S&P 500’s 14-day relative strength index just below 30, a reading that often portends rebounds.
However, the Cboe Volatility Index, or VIX, which measures the magnitude of price moves in the S&P 500, has closed above the psychologically important 20 line for a sixth straight session, according to data compiled by Bloomberg. A level above 20 typically signals rising stock market stress.
The demand for options wagering on a rising VIX is plunging relative to VIX puts, which means traders see more turbulence ahead. Meantime, the riskiest pockets of the market, like the small-capitalization Russell 2000 Index, slumped another 2.7% on Monday.
That isn’t encouraging for large-cap stocks since small-caps historically are the first to bounce if the market is going to rebound, according to Ari Wald, a well-known stock bull and senior analyst at Oppenheimer. Clearly we aren’t there yet.
“We’re unsure about any sustainability in a relief rally that may come for the S&P because small caps are still getting pummeled,” Wald said in a phone interview. “Small caps need to bottom to give an all-clear for the broader market.”
