It's a rough day on the S&P/ASX 200 Index (ASX: XJO) today.
Following on two strong days of gains that saw the benchmark index finish at a new record closing high of 8114.7 points yesterday, the ASX 200 is down a precipitous 2.2% at 7,929 points in midday trade on Friday.
It was a similar story in United States stock markets.
Overnight, the S&P 500 Index (INDEXSP: .INX) closed down 1.4%, while the tech-heavy Nasdaq Composite Index (INDEXNASDAQ: .IXIC) ended the day down 2.3%.
So, what's going on?
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Why is the ASX 200 retreating from all-time highs?
The ASX 200 enjoyed some heady tailwinds earlier this week on both the inflation and interest rate front.
The benchmark index closed up 1.8% on Wednesday when Aussie CPI data came in slightly cooler than the market had priced in, though still significantly above the RBA's target range.
Yesterday's lift to new all-time highs came amid increasing hopes of a September interest rate cut from the US Federal Reserve, with potentially one or more additional cuts on the cards in 2024.
For months now, any bad economic news has tended to fuel stock markets as this implied rate cuts were coming.
Today, however, we look to have returned to a scenario in which bad news for the economy is also bad news for international stocks and the ASX 200.
Yesterday, investors learned that the US Institute for Supply Management's (manufacturing PMI fell to its lowest level in nine months, indicating the world's biggest economy is cooling.
Also stoking investor angst about an economic slowdown in the US, Department of Labor data revealed initial claims for unemployment benefits hit 249,000 last week, the highest level in a year.
Finally, the big spike in volatility is also being driven by the current earnings season, with some companies feeling the heat from high rates and inflation and falling well short of expectations.
What are the experts saying?
Commenting on the big selloff in US stocks that are dragging down the ASX 200 today, Keith Lerner, co-chief investment officer at Truist Advisory Services, said (courtesy of Bloomberg), "Overall, the reason behind today's selloff appears to be that investors are growing concerned that the economy may be slowing down at faster rate and the Fed may be waiting too long to cut rates."
Lerner continued:
As a result, we are seeing an overall defensive market tone. Micro caps and small caps are selling off as they are more economically sensitive and the weakness in data is outweighing the potential benefit of lower rates.
There is a move into defensive areas, such as utilities along with staples and health care, which are less economically sensitive. We also have investors that are selling into the tech bounce, as the prior selloff likely had many managers realising they were too heavy positioned in the sector and are using the rebound to lighten up.
Quincy Krosby, chief global strategist, LPL Financial LLC said, "We've maintained that the market wants to see a rate cut and a series of rate cuts that are predicated on inflation easing so that the economy doesn't need to have a higher rate regime."
Krosby added:
That's what the market wants. The market does not want rate cuts because the economy is moving towards a more material economic slowdown. The concern is that the Fed is behind the curve again.
They were behind the curve in cutting rates. Now the view is if this prevails, they're behind the curve yet again in beginning to ease monetary policy.
Despite today's big retrace, the ASX 200 remains up 8.4% since this time last year.
