(Bloomberg) — The three-day rebound in U.S. stocks ended Thursday as investors sold out of the riskiest assets ahead of Friday’s inflation report and next week’s Federal Reserve policy meeting.
Speculative shares bore the brunt of the selling, with baskets tracking initial public offerings and profitless technology companies slumping about 4%. A Bloomberg long-short portfolio that buys shares with the highest one-month volatility against those with the lowest price swings tumbled 3% — the worst performance among 17 quantitative factors.
It was a return of the turbulence that’s gripped markets since the omicron variant emerged two weeks ago, with the Nasdaq 100 posting its seventh move of at least 1% in the past 10 sessions. Investors sought the relative safety of megacap companies. The Dow Jones Industrial Average ended flat, while small caps lost 2.3% in the biggest divergence since May.
Investors turned bearish before Friday’s consumer price index reading that is expected to show the fastest rate of increase since the early 1980s. Nerves were already frayed after Fed Chair Jerome Powell signaled recently that the central bank is ready to roll back its emergency stimulus, paving the way for rate hikes for the first time since 2018.
“This close, with beta, earnings turbulence and low liquidity getting hit the hardest, is what you would expect to happen if people thought CPI would be really hot and Fed rate-hike expectations increase even more,” said Dennis DeBusschere, founder of 22V Research. “With all the associated worries about the Fed being forced to raise rates to quickly.”
Thursday’s drop came amid some sobering coronavirus news, with hospitalizations rising in the U.S. northeast two weeks after the Thanksgiving holiday. A 30-year Treasury auction also was met with tepid demand, further rattling investors just six days from the Fed’s next policy decision.
The S&P 500 fell 0.7%, halting a three-day rally of 3.6% that was the biggest in more than a year. The Cboe Volatility Index rose back toward 22. The inflation data will land at 8:30 a.m. in New York.
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