Worst day of an awful year leaves no corner of market unscathed

One of the toughest years for financial markets in half a century got appreciably worse Tuesday, with simmering weakness across assets boiling over to leave investors with virtually nowhere to hide.

Stocks buckled for a second day, sending the Standard & Poor's 500 careening toward a correction. Oil plumbed depths last seen a year ago, while credit markets—recently impervious—showed signs of shaking apart. Bitcoin is in a freefall, while traditional havens like Treasuries, gold and the yen stood still.

Add it all up—the 2 percent drop in equities, oil’s 6 percent plunge, the downdraft in corporate bonds—and markets ended up doling out one of the worst single-session losses since 2015. The S&P 500 erased its gain for 2018, oil tumbled to a one-year low and and an ETF tracking junk bonds capped its worst streak of declines since 2014.

“While there’s still no ‘panic in the streets,’ most traders are unconvinced that the selling will slow down anytime soon,” said Larry Weiss, head of trading for Instinet LLC in New York. “The flight to quality is now a flight to cash. It’s tough to convince anyone that now is the time to put money to work.”

Behind the harmonizing losses is dread for the future. Corporate earnings, the fuel for the longest bull market ever recorded in U.S. stocks, appear to have peaked, and President Donald Trump’s trade war shows no sign of abating. As grim as the message from markets has been, Jay Powell’s Federal Reserve shows no sign of easing back on the interest rate hikes that create nightmares for holders of some $5 trillion in corporate bonds that have been sold by S&P 500 companies in the past decade.

Signs of unwinding multiplied. Hedge funds, who dove back into tech stocks at the end of October, have turned net sellers again this month, with the group accounting for the most selling among major industries, client data compiled by Goldman Sachs showed. Meanwhile, they boosted bearish bets against Internet software developers and electronic equipment makers.

“There’s a lot of money looking to be invested and not a lot of places that look appealing enough,” said Bruce McCain, chief investment strategist at KeyBank. “What’s causing the decline across the asset classes is this: Are we going to slide into a recession or are we going to achieve lower growth rate but one that’s more sustainable?”

As of Nov. 15, hedge fund exposure to tech stocks hovered at the lowest relative to the market since December 2015.

Losses continued in Asian equities on Wednesday, though in more muted fashion. The Nikkei 225 Stock Average dropped 1 percent as of 11:25 a.m. in Tokyo, while Hong Kong’s Hang Seng Index fell 0.5 percent. Spreads on the region’s corporate bonds widened.

With bouts of volatility migrating from market to market, 2018 was already trying traders’ nerves. Going by one back-of-the-envelope measure—the year-to-date return of the best performing asset—it’s been the hardest year to invest since the early 1970s, data compiled by Bloomberg show.

While the buzzword for the first half was rotation, now losses are taking on a troubling unanimity. Every sector in the S&P 500 fell on Tuesday, a day after every member of the 67-company S&P 500 Information Technology Index dropped. Disparate corners of the stock market are seeing reversals, from the tech high-flyers like Apple and Alphabet that led the way up to higher-leverage names that have been trailing for months.

“There isn’t an industry that doesn’t have something wrong with it,” said Kim Forrest, a senior portfolio manager at Fort Pitt Capital Group. “Every industry is getting sold. Every industry has a little black mark on it—at least one. So everyone is selling those stocks that are tainted with bad news—everything.”

For investors with a sense of history, the most stomach-turning spectacle has been the deterioration in credit, where the extra yield investors demand over Treasuries widened and new bond sales showed signs of stress. Suddenly, investment-grade bonds are on track for their worst year in terms of total returns since 2008 as the Fed continues to raise rates.

“You always must respect what the credit markets are signaling,” said Quincy Krosby, chief market strategist at Prudential Financial Inc. “Very often it starts with the credit markets and works its way to the equity market. But this time, it’s suggestive of a credit market getting worried about the equity market, and more about the economy.”

Federal Reserve Bank of Minneapolis President Neel Kashkari, who’s repeatedly called for caution on raising interest rates, said further tightening could trigger a recession.

“One of my concerns is that if we preemptively raise interest rates, and it’s not in fact necessary, we might be the cause of ending the expansion” and triggering the next recession, Kashkari said in a National Public Radio interview posted online Tuesday. He said the Fed should “pause and see how the economy continues to evolve.”