Nasdaq 100’s Worst Day Since March Sparked by Inflation Fears

(Bloomberg) -- Stock bulls have shrugged off inflation angst for months. That got a lot harder to do on Tuesday.

Janet Yellen roiled markets when she said interest rates may have to rise moderately to keep the economy from overheating. Already showing signs of jitters over rising prices, investors headed for the exits on the Treasury Secretary’s comments, delivering the worst day since March for the Nasdaq 100.

The mere suggestion that the Federal Reserve may have to unpin rates from near zero -- a comment Yellen softened after markets closed -- was enough to rattle bulls after the latest market runup sparked a flurry of bubble speculation. The S&P 500 has added more than 10% already this year and valuations have reached levels last seen two decades ago.

“Given where valuations are, given where optimism is, given how fast and far we’ve come, it feels like the market is due for a little correction,” David Spika, president of GuideStone Capital Management, said by phone. “There’s a lot of good news out there but it really feels like it’s all priced in.”

Hedge funds have been bailing from equities at a pace not seen since the financial crisis, while tech megacaps have tumbled amid worries that inflation will make it difficult for future profits to live up to elevated valuations.

Stocks with stretched valuations bore the brunt of Tuesday’s selling. A group of unprofitable tech firms tumbled 3.4%, extending its decline from a February peak to almost 30%. An index tracking recent initial public offerings, most of which have yet to make money, sank 2.6%.

As selling picked up, options traders scrambled for protection. At one point the Cboe Volatility Index, a measure of cost for options tied to the S&P 500 known as VIX, jumped to nearly 22. It closed at more than 19, the highest level since March.

Lately, skittishness has been especially visible among professional speculators. Fund clients at Bank of America sold equities for a fifth week, with average selling rising to levels not seen since the firm began tracking the data in 2008. At Goldman Sachs Group Inc., hedge funds in April disposed of stocks for the first time in eight months. Similar pessimism was evident at Morgan Stanley, where clients last week dumped banks and materials stocks.

Even if they’re not known as steadfast bulls, the industry’s exit is getting extreme. It’s not immediately clear what’s behind the selling spree. Yet from stretched valuations to peak growth and the looming risk of tax hikes, the list of reasons for caution is getting long.

“The general impression would be that they see an opportunity to exit at a higher level with the potential to maybe come back into the equity market later in the year,” said Chad Oviatt, director of investment management at Huntington Private Bank. “Hedge funds are opportunistic investors.”

The aversion among hedge funds contrasts with the buoyant sentiment among retail investors and corporate America. At BofA, wealthy individuals snapped up shares for 10 straight weeks while corporate clients accelerated buybacks of their own stocks amid the best earnings season in more than a decade.

After being burned by a retail-driven short squeeze in late January, hedge funds are reloading on bearish wagers. In April, Goldman’s clients boosted short positions on individual stocks for a third straight month.

©2021 Bloomberg L.P.