American stock indices closed lower on Wednesday after a sharp midday decline halted an impressive Wall Street rally triggered by a decrease in interest rates and the Federal Reserve's dovish policy.
All three primary US stock indexes ended the session down by 1.3% to 1.5% below Tuesday's closing.
"Stocks were near historical highs but encountered resistance," said Jay Hatfield, a portfolio manager at InfraCap in New York, noting that the downturn was surprisingly strong, with the market swiftly shifting from hot to cold.
"It's astonishing how aggressive the sell-off is, but it makes sense given how far we've come," Hatfield added.
FedEx (FDX.N) stocks dropped by 12.1% after the parcel delivery company failed to meet quarterly profit estimates and cut its revenue forecast for the year due to competition with United Parcel Service (UPS.N) in the upcoming weak holiday season. UPS fell by 2.9%.
Some traders suggested that the market sell-off might have been amplified by substantial purchases of short-term S&P 500 put options, including put contracts that protected the index from falling below 4755 by the session's end.
Put options grant the right to sell stocks at a fixed price in the future, and hedging associated with options can sometimes increase volatility.
Micron Technology's (MU.O) stocks jumped by 4.4% after the memory chip manufacturer forecasted quarterly revenue higher than expected.
During the session, the S&P 500 index was within 0.5% of its historical closing peak. Achieving a new closing high would confirm that the benchmark index has been in a bull market since closing in a bear market in October 2022.
The index is now more than 2.0% below its record closing high.
"In December, we saw aggressive growth, and investor sentiment was high: they transitioned from bearish to bullish almost in record time," said Thomas Martin, Senior Portfolio Manager at GLOBALT in Atlanta. "So, the markets are asking: 'What now?'"
Last week, the Federal Reserve signaled the end of the rate hike cycle and opened the door to rate cuts in 2024.
Chicago Fed President Ostan Gulsby late Tuesday affirmed that the rate at which inflation cools to the Fed's 2% annual target would drive rate-cutting policy.
According to the FedWatch CME tool, financial markets priced in a 71.1% probability that the first cut would happen as early as March.
On the economic front, a larger-than-expected surge in US consumer confidence and an unexpected increase in secondary market home sales contributed to the rise in major indices.
The US Department of Commerce is expected to conclude the week with its third and final third-quarter GDP report on Thursday, followed by a comprehensive Personal Consumption Expenditures (PCE) report on Friday, covering income growth, consumer spending, and notably, inflation.
The Dow Jones Industrial Average (.DJI) dropped by 475.92 points, or 1.27%, to 37,082, the S&P 500 (.SPX) lost 70.02 points, or 1.47%, to 4698.35, and the Nasdaq Composite (.IXIC) declined by 225.28 points, or 1.5%, closing at 14,777.94.
All 11 primary sectors of the S&P 500 closed down, with consumer goods (.SPLRCS) experiencing the most significant percentage decrease after food packaging company General Mills (GIS.N) reduced its sales forecast.
Alphabet shares rose by 1.2% after the company announced restructuring of its Google advertising sales division.
Consulting company Aon's (AON.N) shares fell by 6.0% after announcing its acquisition of private insurance broker NFP for $13.4 billion.
The number of declining issues on the NYSE exceeded advancers by a ratio of 2.64 to 1; on the Nasdaq, the ratio of 2.26 to 1 favored declines.
The S&P 500 index set 36 new 52-week highs and 1 new low; the Nasdaq Composite index logged 210 new highs and 89 new lows.
Volume on US exchanges amounted to 12.84 billion shares compared to the 20-day average of 12.15 billion shares for a full session.
Regarding currencies, the dollar strengthened against the pound sterling after UK inflation data bolstered speculation of a Bank of England rate cut. The pound last traded at $1.2637, down 0.73% for the day.
The dollar index rose by 0.284%, while the euro fell by 0.36% to $1.0941. The Japanese yen strengthened by 0.19% against the US dollar to 143.56 per dollar.
In commodity markets, the global benchmark Brent crude oil fluctuated above $80 per barrel amid concerns about disruptions in global trade and geopolitical tensions in the Middle East following attacks on ships in the Red Sea by Yemeni Houthi forces linked to Iran.
US oil rose by 0.38% to $74.22 per barrel, while Brent traded at $79.70, up by 0.59% for the day.
Regarding precious metals, spot gold dropped by 0.4% to $2031.61 per ounce. US gold futures fell by 0.27% to $2034.50 per ounce.
