Jan 24, 2022 - Economy

Investors reset their compass

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

The endpoints of a stimulus-fueled market are being defined.

Why it matters: Conditions that drove excess pricing in riskier assets are steadily being removed, and big swings in the market like those seen today are inevitable as investors try to adjust to the new landscape.

Catch up quick: After a broad and deep sell-off earlier in the day, all three major averages rallied to close higher.

  • The S&P briefly entered correction territory (defined as being more than 10% from its record close earlier in the month).

The big picture: Investors continue to shuffle bets as they evaluate new market conditions with less government intervention.

Today's trades were triggered by crashes in unprofitable and speculative tech companies, meme stocks, SPACs and crypto, Jay Hatfield, chief investment officer at Infrastructure Capital Management, tells Axios.

  • That then dragged down lower-risk, more profitable tech companies like Apple and Amazon, which drove down the S&P, which then induced investors to sell additional stocks, he adds.
  • The market bounced back hard in part as hedge funds like his started to cover their short positions, says Hatfield.

By the numbers: Recent SPAC companies like satellite launcher Virgin Orbit (-17.9%) and electric vehicle maker Arrival (-9.4%) were among the day’s biggest losers, as well as WeWork (-9.8%) and GameStop (-5.9%).

What to watch: Whether the Fed signals it will take a slower approach to quantitative easing when it meets Tuesday and Wednesday.

  • "You definitely don't want to be in the market when the Fed [is taking liquidity out] aggressively," says Hatfield.

The bottom line: Bets that made sense when the Fed began to intervene may no longer make sense now.

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