Why is the ASX 200 having a day to forget on Monday?

The ASX 200 is giving back some of Friday's outsized gains today.

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The S&P/ASX 200 Index (ASX: XJO) is taking a tumble on Monday, down 0.6%.

The big retrace comes after the benchmark index finished up an impressive 1.3% on Friday and 0.5% on Thursday.

Which again highlights why, as long-term investors, we shouldn't be too focused on the daily moves.

Nonetheless, it's certainly a big turnaround from Friday's bullish trading on the ASX 200.

So, what going on?

Why is the ASX 200 tumbling today?

The Aussie market is following in the footsteps of US markets, as is often its wont.

On Friday, all the major US indexes finished deep in the red, after also posting hefty gains the prior trading day.

The S&P 500 Index (SP: .INX) closed Friday down 1.2% on Friday. The tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) tumbled 1.6%.

We're seeing that trend mirrored here, with the S&P/ASX All Technology Index (ASX: XTX) – which also contains smaller tech stocks outside the ASX 200 – down 1.7%.

There's no real bombshell to explain the big shift in sentiment.

But the US Federal Open Market Committee (FOMC) is set to announce its next interest rate decision in the ongoing battle with inflation on Wednesday (Thursday morning Aussie time). And with a few days of outsized gains behind us, it looks like there's some money being taken off the table today by jittery investors.

Consensus estimates overwhelmingly expect the Fed will keep rates on hold at the current 5.25% to 5.50% range.

In fact, the CME FedWatch Tool, futures are factoring in 99% odds of a Fed pause this week. Futures indicate 70% odds the central bank will also hold rates tight at the following meeting, on 1 November.

Interestingly, many economists disagree.

Perhaps throwing up some headwinds for US stocks and the ASX 200 is sentiment reflected by this survey of economists by the Financial Times (courtesy of the AFR).

More than 40% of surveyed economists said they believe the Fed will hike rates at least two more times before getting the inflation genie back in the bottle.

According to Julie Smith, professor of economics at Lafayette College:

Some of the signals that we're getting are that policy isn't that tight… It doesn't seem like there is enough pullback from consumers to slow the economy, and I think that's really the issue.

What else is pushing and pulling on markets?  

It's also important to remember just how high interest rates have already gone over the past 18 months.

Money market funds are now offering yields of more than 5%, with a lot less risk than investing in ASX 200 shares.

With yields on the rise from virtually zero in early 2022, some US$1 trillion has already poured into global money market funds so far in 2023.

Atop the more attractive yields, the rush into cash funds is also likely being fuelled by investor nerves in these uncertain times.

Yet while 5% interest isn't bad, it's well below the 12% one-year returns delivered by the S&P/ASX 200 Gross Total Return Index (ASX: XJT), which includes reinvested dividends.

And it's not even close to the 21% one-year gains posted by the ASX All Tech Index.

While long-term investors may be watching their portfolio dip today, once the broader jitters settle and some of that trillion-plus dollars returns to the stock markets, that cash pile could fuel a big rally.

That's a rally investors waiting on the sidelines too long will likely miss out on.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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