The US-based S&P 500 Index (SP: .INX) had a day to forget on Wednesday.
Yesterday, overnight Aussie time, the S&P 500 ended its winning streak by closing the day down 1.5%. That represents the biggest one-day fall since 26 September.
It was a similar scene on the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC), which also closed down 1.5%.
The S&P/ASX 200 Index (ASX: XJO) was following the lead of the US indexes today, with the Aussie benchmark index down 0.6% in morning trade on Thursday before rebounding. At the time of writing, the ASX 200 is down 0.36%.
So, what's happening with the big Santa Claus rally in the United States?
Why did the S&P 500 tumble overnight?
First, when looking at big intraday moves, be they higher or lower, it's important to take a step back.
As a long-term investor, I'm much more interested in the longer-term performance of the S&P 500 and ASX 200 than any single day of big gains or losses.
In that light, remember that it was only on Tuesday that the S&P 500 finished the day at 4,768 points as investors raised their bets on potential interest rate cuts from the US Fed next year. That saw the index within a whisker of its all-time highs set in early January 2022.
And even after the big overnight retrace, the S&P 500 is still up a very strong 22.9% in 2023. For some context, that compares to an 8.5% gain posted by the ASX 200 over this same period.
With that perspective in mind, why did the US markets come under heavy selling pressure?
Well, it looks like they got caught by several headwinds.
First, ongoing attacks by Houthi rebels in Yemen on cargo ships in the Red Sea are causing delays and a spike in costs. And investors appear to fear there may be worse to come.
That could be partly responsible for the Volatility Index (VIX), the US market's fear gauge, spiking from near multi-year lows.
Commenting on the big factors pressuring the S&P 500 and other major indexes, Newedge Wealth chief investment officer Cameron Dawson said (courtesy of Bloomberg), "It certainly looks like it has become very one-sided, and it is a scary world when everybody gets on one side of the boat."
Dawson added:
The market is very extended, we do see it being very overbought. But we're in this melt-up period and so oftentimes things can get even sillier before they really do have a pullback.
According to Bloomberg, there was also speculation that expiring zero-day options may have increased selling pressure on the S&P 500, with options dealers selling in order to rebalance their positions before they expired.
