After the Close
U.S. stocks were down across the board on Thursday, as investors revealed growing concerns regarding the Federal Reserve’s interest-rate strategy and, especially, apparent discord within the White House that could threaten key economic policies from being implemented. The tech-laden NASDAQ was the biggest laggard on the day, while the S&P 500 tumbled 1.5%. The Dow Jones Industrial Average, where a positive earnings season had previously offset some of the negative headwinds infecting the market in recent weeks, the blue-chip grouping lost roughly 274 points during today’s rout by the bears. As much of the selling pressure came from large-cap equities, market breadth favored losing shares by only a two-to-one ratio.
Though a number of economic updates were made available to traders today, they likely played a negligible role in influencing the market today. Rather, yesterday’s unveiling of minutes from the Federal Open Market committee’s July meeting has highlighted a divergence of opinions on inflation from within the central bank. While dovish members favor the deliberate pace taken by the Fed as it looks to tighten monetary policy later in the year, there is a growing clamoring among others that suggests waiting too long to increase the federal funds rate could hurt the end up hurting the economy as the labor market reaches full employment.
But the biggest factor playing into today’s downward trend was the mounting uncertainties regarding the White House’s plan to introduce key legislation on infrastructure, deregulation, and, perhaps most important, tax reform. The President’s reaction to the protests in Charlottesville, Virginia was maligned by statesmen on both sides of the aisle, resulting in the dissolution of two business councils comprised of executives across many industries. Moreover, a since-refuted rumor that Gary Cohn, chief economic advisor to the President, was considering stepping down from his post sowed further uncertainty in trading. Also factoring into investor’s unease was the deadly van attack in Barcelona, further hurting sentiment.
At day’s end, each of the ten major market sectors bore meaningful aggregate losses. Basic materials, finance, and technology were especially weak, underscoring the looming concerns over the passing of the White House’s economic agenda. As for the indexes, losses continued to widen into the final minutes of the session. The bulls will look to bounce back on Friday, though they’ll need some help in the form of optimistic political or economic news to make up for today’s wide selloff. – Robert Harrington
As of this article’s writing, the author did not hold positions in any of the companies mentioned.
Mid-Day Update - 11:35 AM EDT
The major equity averages, off of yesterday’s late-session selloff that saw a good portion of the day’s gains pared, started the week’s penultimate trading day in the red. The losses then widened as the morning progressed, with a number of non-earnings factors weighing on stocks. Thus, as we near the midday hour on the East Coast, the Dow Jones Industrial Average, the NASDAQ, and the broader S&P 500 Index are off 75, 40, and 10 points, respectively. In general, the selling has been broadbased, with the small and mid-cap sectors joining their large-cap brethren in the red. Also, declining issues are leading advances by a notable margin on both the New York Stock Exchange and the NASDAQ.
It is also a sea of red ink among the 10 major equity groups, with the biggest laggards being the economically sensitive categories, most notably the basic materials, financial, and technology areas. The weakness among the economy driven sectors can likely be traced to news that two of the business councils started by President Trump will be disbanded, as several industry leaders have backed out of participating after the President’s comments on the Charlottesville, Virginia tragedy this past weekend. The events also raised doubts about whether the tax cuts promised by the Administration will come to fruition this year, given the dysfunctional Washington D.C. political scene.
The market did not seem to be particularly happy either with what they read in the minutes from the latest Federal Reserve meeting. The report showed that Federal Reserve policymakers are concerned about the persistently weak inflation data, which may muddy the course of future interest-rate hikes. That, along with news that the central bank looks set to begin reducing its more than $4 trillion portfolio of Treasury bonds and mortgage-backed securities next month, is hurting equities. Of note, some of the higher-yielding equity groups are weaker today, as the potential bond selling would likely push fixed-income lending rates higher, which makes higher-yielding and typically more risky equities less attractive to income-oriented investors.
Meantime, we did get some data on the U.S. economy this morning. Specifically, the Federal Reserve reported that industrial production rose 0.2% in July following an increase of 0.4% in June. In July, manufacturing output edged down 0.1%; the production of motor vehicles and parts fell substantially, but that decrease was mostly offset by a net gain of 0.2% for other manufacturing industries. Likewise, following a six-month string of increases beginning in September 2016, factory output was little changed, on net, between February and July. The indexes for mining and utilities in July rose 0.5% and 1.6%, respectively. Overall, we don’t think this data are having much of an impact on trading, as investors are focusing more on the Washington D.C. political scene and the musings from the Federal Reserve. On the latter note, Dallas Federal Reserve Bank President Robert Kaplan is scheduled to speak about monetary policy later this afternoon.
Looking ahead to the remainder of today’s session, we think that the bears may be tough to beat. Absent the major economic and earnings news investors have been accustomed to receiving over the last fortnight, though it should be noted that Dow-30 components Cisco Systems (CSCO – Free Cisco Stock Report) and Wal-Mart Stores (WMT – Free Wal-Mart Stock Report) did report their latest quarterly results since the close of trading yesterday afternoon, they are likely to continue focusing on Washington D.C. and the Federal Reserve, which is not looking like a good thing for stocks right now. Stay tuned. – William G. Ferguson
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Before the Bell
Following a strong trading session on Monday and some backtracking on Tuesday, the bulls began trading yesterday with a new head of steam, as the leading averages all moved out to impressive early gains. On point, after we had passed the first half hour of market action, the Dow Jones Industrial Average had rung up a gain of some 70 points. Modest rallies also were under way on the S&P 500 and the NASDAQ. Also, yesterday, unlike Tuesday, the S&P Mid-Cap 400 and the small-cap Russell 2000 were comfortably in the black, as well.
Meanwhile, the market's morning uptick came ahead of the Federal Reserve's 2:00 PM (EDT) release of minutes from its last FOMC meeting. But it came after the issuance of data showing that housing starts had come in at a seasonally adjusted 1,155,000 units in July. That was 4.8% below the revised June estimate of 1,213,000 homes. Further, building permits, a more forward-looking metric, came in at 1,223,000 homes last month; that was 4.1% below the June tally of 1,275,000. But that setback had little influence on the stock market, as a Federal Reserve interest rate hike at next month’s meeting already had seemed unlikely.
As to the minutes, Wall Street was looking for clues about the Fed's interest rate intentions. The report, meantime, suggested that there was now a split developing on the Fed regarding whether to tighten the monetary reins again this year, citing concerns about low inflation balanced out by improving GDP growth. Our sense continues to be that the Fed will raise rates just once more in 2017, and that such an adjustment might not come until late this year. Meantime, the market's advance remained in place as the morning wound down, with the Dow's advance holding in the 60-85 point range as noon arrived in New York. The NASDAQ, up haltingly early in the session, strengthened as the afternoon approached, with its advance surpassing 25 points.
The stock market then stayed near the upper levels of its range for the next hour, or so, but ill winds politically, as other companies now have decided to abandon the President's manufacturing council following last weekend's violence in Charlottesville and the Administration's changing response to it, fueled some selling as the 2:00 PM hour approached. In all, the Dow's advance went from more than 85 points down to fewer than 30 points at one time. Still, the market had a generally strong tone to it, which suggested at the time that unless the minutes held some unwanted surprises, the day would end higher for stocks.
The Fed minutes had little impact, with stocks initially rising then pulling back, with the Dow's gain at one point nearly evaporating. Our thinking is that this Fed release will have little meaningful impact, with political headwinds probably more of an influence at this moment on market behavior. Traders, meantime, then backed off somewhat as we headed into the close, with the Dow ending the session ahead by a modest 26 points, while the NASDAQ, which waxed and waned late in the day, finally ending matters up by 12 points. Meantime, the Russell 2000, once ahead strongly, edged down a trifle at the conclusion of the day's action.
Looking out at a new day and ahead of the pending release of industrial production and factory use data, we see that stocks were generally mixed in Asia overnight, while political issues stateside are pushing equities a little lower on the Continent this morning. Also, oil is trickling lower; gold and silver are up again; and Treasury yields are climbing slightly in our country, as investors digest the Fed minutes and look out at the political risk now on the rise at home. Finally, U.S. equity futures are falling, most notably on the NASDAQ. – Harvey S. Katz
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
