Why markets are suddenly on edge

By John Towfighi, CNN

New York (CNN) — For months, it felt like nothing could knock stocks off their steady ascent — but November has been a rough month on Wall Street.

The tech-heavy Nasdaq Composite is down almost 3.5% this month and on track for its first losing month since March. The Nasdaq has shed roughly $1.74 trillion in market value in two weeks as investors have dumped tech stocks.

Stocks opened sharply lower Friday before bouncing off their lows as investors bought the dip. The major indexes wavered into the closing bell. The Nasdaq turned positive and closed higher by 0.13% after briefly falling almost 1.9%. The S&P 500 fluctuated and closed lower by 0.05%. The Dow fell 310 points, or 0.65%.

“Stocks were set for another horrific session at the open following yesterday’s debacle but investors saw the sharp dip as an opportunity to accumulate shares,” said José Torres, senior economist at Interactive Brokers.

The benchmark S&P 500 is still down 1.55% this month while the Dow is down 0.87%. The S&P 500 has shed more than $1.3 trillion in market value in just over two weeks as it has retreated from a record high set in late October.

After months of gains, investors have outsized expectations, making them easer to disappoint. Tech stocks have become relatively pricey.

And after the government shutdown halted official data releases for weeks, investors are unsure what the new figures, as government releases resume, will show about the state of the world’s biggest economy. That, in turn, is stoking uncertainty about whether the Federal Reserve will continue to cut interest rates in December, and adding to the Wall Street jitters.

“When the government was shut down, we could believe whatever we wanted to believe,” Ed Yardeni, president of Yardeni Research, told CNN’s Matt Egan. “Now we need to be data dependent, and that may not be as much fun.”

Enthusiasm about artificial intelligence carried the market to new record highs this year. But now some investors are hitting pause, taking profits and reassessing whether those stocks will continue to produce superior returns.

“With lofty valuations in AI-related stocks, it’s understandable that investors are on edge about anything that might go wrong,” Yardeni wrote in a Thursday note.

Bitcoin, which can serve as a gauge of how risk-on investors are feeling, slid 4% on Friday and hovered around $94,500. The cryptocurrency has tumbled 25% since it hit a record high in early October.

Data deluge incoming

Wall Street and the Fed are awaiting a deluge of economic data that was delayed due to the shutdown.

That is contributing to mounting nerves about the Fed’s next move. Traders on Friday were pricing a 46% chance the central bank will cut rates in December, down from a 96% chance one month ago.

At the last policy meeting, in October, Fed Chair Jerome Powell cast some doubt on whether the Fed would cut rates again this year. Fed officials — including Boston Fed President Susan Collins, who is a voter on policy moves this year — delivered remarks this week that have shown hesitancy to continue cutting rates.

While Evercore ISI analysts in a note said they still see an interest rate cut next month, they think it’s “very hard to call” because of a combination of factors, including “data blindness.”

The central bank’s rate cuts in September and October boosted stocks, and a pause on rate cuts could pose troubles for stocks that have rallied on expectations for lower borrowing costs — in particular, the AI and tech stocks that have propelled the market higher.

“Extreme fear” was the sentiment driving markets on Friday, according to CNN’s Fear and Greed index.

But some investors say a pullback in stocks can also be healthy.

The Nasdaq gained every month from April through the end of October. Now, the market is resetting as investors reassess the outlook.

“This (pullback) is somewhat overdue, and I don’t think it’s the start of a correction,” Yardeni said.

AI jitters

There is also increasing skepticism about whether Big Tech companies can make enough money to justify the enormous spending taking place on AI deals now.

“The technology sector has faced selling pressure in recent weeks amid concerns over rising debt issuance and a surge in capital expenditures” like new data centers, Keith Lerner, chief market strategist at Truist, told CNN’s Matt Egan in an email. “Investors are questioning whether these investments will translate into future profitability.”

Oracle shares (ORCL) surged 36% in one day on September 10 after the company announced a $300 billion deal with OpenAI. Shares in Oracle have tumbled since then, erasing those gains.

“Companies announcing large supply deals with OpenAI have similarly been met with skepticism around OpenAI’s ability to deliver on its financial objectives,” John Belton, portfolio manager at Gabelli Funds, said in an email.

It’s not just Oracle facing pressure. Meta shares (META) are down 23% since hitting a record high in mid-August. Nvidia shares (NVDA) are down 10% since hitting a record high in late October. Palantir shares (PLTR) are down 16% since hitting a record high on November 3.

“What’s happened recently in the market isn’t even close to a tech wreck, but it may be a bit of a tech reckoning,” said Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research & Strategy Team.

To Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, this month has been defined by investors rotating out of tech stocks and into other sectors.

The recent pullback, he said, feels like “investors trying to protect profits after a really healthy run off the lows in April.”

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