Why the stock market just got clobbered

A convergence of factors joined forces on Wednesday to scare the bull thesis in stocks and really hit the market into the bottom.
The losses in the Dow Jones Industrial Average (2.2%), the Nasdaq Composite (2.7%) and the S&P 500 (2.6%) all accelerated towards the close. The sell-offs marked the biggest slump in major indices since October, notes Yahoo Finance market reporter Jared Blikre.
The session on Wednesday was shaky, but experts point out two things, particularly for the hearty profit-taking through the closing bell.
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First, the bad mood on Wall Street quickly spread after the recent Federal Reserve meeting and Chairman Jerome Powell's press conference. Traders have noted key changes in the FOMC statement that collectively challenged the timing of the economic recovery from the COVID-19 pandemic.
"The FOMC's assessment of the economy has deteriorated," said Zachary Griffiths, Wells Fargo strategist. "In its policy statement, the Fed acknowledged the recent decline in economic activity amid a deteriorating public health situation, commenting:" The pace of economic recovery and employment has slowed in recent months. "
Recall for most of December and well into the first half of January, stocks were aggressively raised in hopes of a V-shaped economic recovery later this year as people received COVID-19 vaccines and another dose of fiscal stimulus. In fact, it was this thesis that sparked Wall Street's reflation trade. Stocks in these reflation businesses like Disney, Boeing and Goldman Sachs were among the Dow's biggest losers on Wednesday.
Unfortunately for the bulls, this bullish reflation move seems dead in the water for now, thanks in part to the Fed's comment.
The other component of the router is likely nothing more than the absurdity that unfolds in super speculative stocks.
A rush of retail investors battling short sellers on Wall Street in Reddit chat rooms continues to send stocks of fundamentally weak, severely shortened companies through the roof. AMC shares exploded 300% at close of trading. The stock is up 552% in the last five sessions. GameStop shares rose another 134% and rose to 766% in five days. Koss Corporation's stock was up 480% - 1,358% in five days.
"Maybe some margin calls - I don't see anything else - but when stocks move that much it hurts someone," one seasoned strategist told Yahoo Finance.
The bewildering gains in the above companies - and others like them - have asked many on Wall Street whether the market hit a short-term high late last week or early this week. Such rampant, euphoric behavior with these types of stocks has often been followed in the past by major falls in the broader market.
“Yes, the risks have increased. Many Wall Street bets fail the smell test, ”Lori Calvasina, head of US equity strategy at RBC Capital Markets, told Yahoo Finance Live.
Morgan Stanley strategist Andrew Slimmon agrees, “I think this is a sign that we are going to get to the top and get a pullback. That's just one of the signs. "
Brian Sozzi is an editor and presenter at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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