By Chuck Mikolajczak
NEW YORK (Reuters) -U.S. stocks plunged on Wednesday, with all three major indexes posting their biggest daily decline in months, after the Federal Reserve cut interest rates by a quarter of a percentage point but disappointed some investors with projections that signaled a more cautious path of easing next year.
The Fed cut rates by 25 basis points to the 4.25%-4.50% range and its summary of economic projections (SEP) indicated it will make rate cuts totaling a half percentage point by the end of 2025 given the solid labor market and the recent stall in lowering inflation.
"If you look at the changes to the statement of economic projection, they really had no choice," said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts.
"So as you look at all the changes that they made, it's very clear that the economy is running a lot hotter than their previous projection. And that has got to contribute to their desire to potentially pause."
The Dow Jones Industrial Average fell 1,123.03 points, or 2.58%, to 42,326.87, the S&P 500 lost 178.45 points, or 2.95%, to 5,872.16 and the Nasdaq Composite lost 716.37 points, or 3.56%, to 19,392.69.
The Dow suffered its 10th straight session of declines, its longest streak of daily losses since an 11-session skid in October 1974.
The Dow and S&P saw their biggest one-day percentage decline since Aug. 5 and the Nasdaq saw its biggest daily decline since July 24.
The small cap Russell 2000 dropped 4.4%, its biggest drop since June 16, 2022. Small cap stocks are seen as more likely to benefit from a lower interest rate environment.
Despite the declines, the Dow is up nearly 12.3% on the year, while the S&P has rallied about 23% and the Nasdaq has shot up more than 29%, lifted largely by technology companies and enthusiasm around artificial intelligence, along with prospects of a lower rate environment and more recently, the hope of deregulation policies from President-elect Donald Trump's incoming administration.
However, investors are also wary that some of Trump's expected policies, such as tariffs, could rekindle higher inflation.
The CBOE Volatility Index - an options-based gauge of investor expectations for near-term stock market gyrations - jumped 11.75 points to close at a four-month high of 27.62.
U.S. Treasury yields moved higher after the statement as the benchmark U.S. 10-year note touched its highest level since May 31 at 4.518%.
"You've got the 10-year creeping back up, around that 4.5% and particularly the 5% level that's been a real problem for equity markets," said Ross Mayfield, investment strategist at Baird in Louisville, Kentucky.
"Probably the most obvious headwind or point of contention for markets in the first quarter of next year is whether the markets interpret the policies on the table as inflationary and, or, pro-growth, both things are embedded in the 10-year."
Markets were pricing in expectations the Fed will hold rates steady at its January meeting, while factoring in about 33 basis points (bps) in cuts for 2025, down from 49 bps immediately after the Fed statement.
Higher interest rates are usually seen as a drag to the equity market, boosting the appeal of less risky assets while crimping the ability of companies to grow earnings.
Each of the 11 major S&P 500 sectors were lower, with real estate, down 4%, and consumer discretionary leading declines, off 4.7%.
Cryptocurrency related stocks fell, with losses accelerating after Powell said the central bank is not allowed to own bitcoin and is not seeking a law change in order to do so. There has been speculation Trump's incoming administration might seek to build a government owned stock of the asset. Microstrategy (NASDAQ:MSTR) tumbled 9.5%, MARA Holdings plunged 12.2% and Riot Platforms (NASDAQ:RIOT) fell 14.5%.
Declining issues outnumbered advancers by a 9.489-to-1 ratio on the NYSE, and by a 5.46-to-1 ratio on the Nasdaq.
The S&P 500 posted six new 52-week highs and 27 new lows, while the Nasdaq Composite recorded 80 new highs and 264new lows.
Volume on U.S. exchanges was 18.59 billion shares, compared with the 14.36 billion average for the full session over the last 20 trading days.