What happened that caused the biggest single-day drop in US stocks in a month?

The brief optimism following the end of the US government shutdown quickly dissipated, with market focus shifting to a large amount of delayed economic data, uncertainty surrounding the prospect of a Federal Reserve rate cut, and concerns about overvalued tech stocks, triggering a widespread sell-off in both high-valuation tech stocks and risk assets. On Thursday, October 13th, all three major US stock indexes fell sharply in trading, with the tech-heavy Nasdaq Composite Index closing down 2.29%. The deteriorating risk sentiment also spread to the cryptocurrency market, with Bitcoin falling below the $100,000 mark and Ethereum dropping by more than 10% at one point. The immediate catalyst for this sell-off was the cautious comments from several Federal Reserve officials, suggesting that interest rate cuts should be approached with caution. According to data from the CME Group, the probability of an interest rate cut in the interest rate futures market has plummeted from over 70% a week ago to around 50%. This shift has exacerbated the market rotation that has been underway this month. Investors are reportedly taking profits from this year's hottest stocks and moving into lower-valued, more defensive sectors, a "risk-averse" trend that was on full display in Thursday's trading.

US stocks suffer biggest one-day drop in a month

With the US government shutdown over and economic data releases delayed, investors reassessed the prospect of a December rate cut by the Federal Reserve, leading to the biggest one-day drop in US stocks in a month on Thursday.

US benchmark stock indexes:

The S&P 500 closed down 113.43 points, or 1.66%, at 6737.49.

The Dow Jones Industrial Average closed down 797.60 points, or 1.65%, at 47,457.22, retreating from its record closing high. The Nasdaq Composite closed down 536.102 points, or 2.29%, at 22,870.355. The Nasdaq 100 closed down 536.102 points, or 2.05%, at 24,993.463. The Russell 2000 closed down 2.77% at 2,382.984. The VIX volatility index closed up 14.33% at 20.02, having risen as high as 21.31 at 04:23 Beijing time before giving back some of its gains. The Magnificent 7 (Megatech 7) index fell 2.26% to 203.76 points. Tesla closed down 6.64%, Nvidia down 3.58%, Alphabet (Google) down 2.84%, Amazon down 2.71%, Microsoft down 1.54%, while Meta closed up 0.14%. The Philadelphia Semiconductor Index (SSE) fell 3.72% to 6818.736 points. AMD fell 4.22%, TSMC fell 2.90%. Oracle closed down 4.15%, Broadcom down 4.29%, and Qualcomm down 1.23%. Several Federal Reserve officials have made hawkish remarks, causing "centrists" to waver. Several Federal Reserve officials have expressed concern about inflation and caution regarding future interest rate cuts. Cleveland Fed President Hammack (a 2026 FOMC voting member) stated that he expects inflation to remain above the 2% target for the next 2-3 years. With a weak job market, the Fed's employment target (the employment aspect of its dual mandate) is facing challenges. Tariffs are expected to push up inflation and continue into early next year. The Fed needs to maintain a degree of policy restraint to cool inflation. Minneapolis Fed President Neel Kashkari said on Thursday that he opposed last month's interest rate cut due to the resilience of the economy and is taking a wait-and-see approach to the December decision. St. Louis Fed President Alberto Musalem also reiterated his view that monetary policy needs to "hold back" inflation. Due to concerns about inflation and the belief among some officials that the labor market remains robust, a growing number of policymakers are hesitant to further ease monetary policy, including some previously staunch supporters. The latest development is that Boston Fed President Susan Collins and San Francisco Fed President Mary Daly—both officials who voted for rate cuts this year—have issued their clearest signals of caution to date. Collins stated bluntly that the "threshold" for further policy easing in the near term is relatively high, while Daly said it's too early to draw conclusions about a December decision and that she is "open-minded." The upcoming deluge of data (which could bring more, not less, uncertainty), coupled with the recent flurry of hawkish statements from officials, has pushed market bets on a December rate cut back below 50%.

Two Possibilities for the December Meeting

Looking ahead to the December meeting, the outcome seems to be leaning towards "two options": either keep interest rates unchanged or cut them again by 25 basis points. According to an analysis by Nick Timiraos of The Wall Street Journal, another possibility is that the Fed, while cutting rates in December, will also set a higher threshold for further easing policies through policy guidance.

Regardless of the final decision, Powell is likely to face more dissenting votes than at the October meeting (where both sides disagreed).

In a report released Thursday, Evercore ISI Vice President Krishna Guha wrote that Collins' explicit opposition to a December rate cut "exacerbates our concerns about Powell's ability to manage divisions within the FOMC." Guha analyzed that if the Fed decides to cut rates, Kansas City Fed President Jeffrey Schmid might receive support from Collins and Musalem, among others; if the Fed decides to hold rates steady, then Governor Stephen Miran, who previously advocated for a larger rate cut, might join Governors Christopher Waller and Michelle Bowman, who also support accommodative policies, in voting against it. This further highlights the deep divisions within the committee, making the December decision highly uncertain.