Equities collapsed on Thursday — erasing Wednesday’s melt up following the Federal Reserve’s decision to raise interest rates for the first time in nine years — as the U.S. dollar soared, crushing everything from commodities to junk bonds and energy stocks.
I guess 24 hours is the time it takes for the bulls on Wall Street, which have been using a very narrow group of stocks to hold the overall market aloft, to realize that the start of the Fed’s first policy tightening campaign in 11 years isn’t exactly a positive catalyst.
In the end, the Dow Jones Industrial Average lost 1.4%, the S&P 500 fell 1.5%, the Nasdaq Composite dipped 1.4% and the Russell 2000 finished the day 1.2% lower. For the year, the Dow is down 1.8% while the S&P 500 is off 0.8%.
Defensive utility stocks led the way with a 0.1% gain while energy stocks were the laggards, down 2.5%. Pandora Media Inc (NYSE:P) gained 13.5% thanks to two analyst upgrades. SolarCity (NASDAQ:SCTY) gained another 6.7% as the positive vibes surrounding an extension of solar investment tax credits continues.
United States Steel Corporation (NYSE:X) lost 10.6% after suffering a downgrade from Deutsche Bank on fears over a lower steel price environment.
Treasury bonds were stronger, the dollar gained 1.4% to jump back over its 20-day moving average, gold was hit hard, and crude oil lost another 1.9% to push back to its recent lows at $36.27 a barrel. The PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC) fell 1.1% to a fresh lows that already exceed the 2008/2009 financial crisis lows.
The big drag on the day was the resumption of selling pressure against high-yield junk bonds after a number of analyst notes highlighted concerns in these areas.
Remember, the cycle is feeding on itself now: Steady job gains and a stabilization of inflation has pushed the Fed to hike, which is strengthening the dollar and weighing on energy prices, with the combination of FX impacts and lower commodity prices weighing on corporate earnings growth.
Lower profitability (S&P 500 earnings are expected to drop in the fourth quarter for the third consecutive quarter) and higher interest rates is toxic to the junk bond market where trading volumes are light (a consequence of years of ultra-low interest rates) and any price weakness is magnified as a result.
The Barclays High Yield Bond ETF (NYSEARCA:JNK) lost 1.1% while the High Yield Corporate Bond Fund (NYSEARCA:HYG) also lost 1.1%.
On the economic front, Philly Fed Manufacturing Activity Index missed expectations falling to -5.9 in December vs. 1.9 in November against the 2.0 that was expected. This is the third negative reading in the last four months and the lowest level of the year. This follows a weak manufacturing PMI report from Wednesday that dropped to 51.3 — indicating the lowest level of manufacturing activity growth in more than three years.
Technically, stocks are a mess right now.
The Russell 2000 is down nearly 6% for the year-to-date, as stocks like Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB) are all that’s preventing the major market averages from joining pretty much every other asset class to the downside.
Small caps, utility and transportation stocks are significantly weaker; commodities are a fallout zone; fixed-income is being hit; emerging-market stocks are mired near their August-October lows.
Just look at the chart above, comparing the Russell 2000 (red) to the Nasdaq 100 (black).
As a result, I continue to recommend a defensive, long-volatility focus to my Edge subscribers with the VelocityShares 2x VIX (NASDAQ:TVIX) up more than 16% so far this month.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
