After the Close
U.S. stocks retreated from the highs set on Monday, with each of the three major indexes trading near their intraday lows as the closing bell approached. The day-long selloff can be mostly attributed to weakness in the energy sector, where cautious optimism that OPEC and other producers would inject some normalcy into the market has all but faded. Lingering doubts stemming from lackluster releases from the business beat in the past week were additional headwinds likely bolstering the bears’ campaign today. Disappointing metrics on retail, industrial production, housing starts and others have added credence to the growing consensus that 2.5% GDP growth in the quarter is more likely than the 3% estimate from a few months ago. All but one of the ten major market sectors closed in the red today, while the NASDAQ registered the widest loss, 51 points (0.82%).
Also contributing to the bearish undertone to today’s trading was speculation on tax reform. Reducing the federal obligation for corporations as a means of accelerating economic growth was a core tenet of President Trump’s campaign and the market’s ongoing, multi-month rally since his election. Recently, with a protracted debate over healthcare replacement, another cornerstone policy, concern grew that the business-friendly strategies promised by the Administration would take longer than expected. In an effort to reinstall some confidence in the policy and its timing, Secretary of the Treasury Steven Mnuchin claimed there was 100% certainty that reform would be implemented by the end of the year. Then, this afternoon Speaker Paul Ryan insisted that 3% GDP growth was unattainable without a reconfiguration of the corporate tax code, another sign that tax reform is a near-term priority for many lawmakers.
Still, the weakness in the oil sector was the most tangible influence at play in today’s trading. Oversupply concerns across most of the world’s oil producing markets has plagued prices for some time, with recent trends from Nigeria and Libya troubling investors. That OPEC and its partners were unable to enact a long-term solution to this problem has only served to worsen sentiment for the commodity. Though it pared some of its early morning deficit, U.S. crude oil still saw more than 2% of its per-barrel value decrease today.
All told, though market breadth remained firmly in favor of the bears at the close, today’s pullback should not be too concerning. Profit takers were likely out in force looking to cash in on recent highs, while next month’s earnings season is expected to usher in another wave of optimism to the still-strong market. – Robert Harrington
As of this article’s writing, the author did not hold positions in any of the companies mentioned.
Mid-Day Update - 12:00 PM EDT
After charging out of the gate quickly yesterday to start the new week, the bulls have encountered a little rougher going thus far today. The market's caution, which follows a mixed performance overnight in Asia and a slightly softer outcome in Europe this morning, reflected concerns about oil. On point, this volatile commodity, which had recovered smartly earlier this year, before reversing course during the spring, has now entered bear market territory, with a peak-to-trough setback of more than 20%. In all, the commodity is now at its lowest point since last November.
The latest problem with oil reflects concerns about rising output on the world's stage, especially in Nigeria and Libya. That concern pushed prices for the West Texas Intermediate crude oil contract down nearly 3% today, to below $43 a barrel. Oil had been in the mid-$50-a-barrel range earlier this spring. Oil stocks are notably weaker, with shares of both energy components on the Dow Jones Industrial Average, Chevron (CVX - Free Chevron Stock Report) and Exxon Mobil (XOM - Free Exxon Mobil Stock Report), off by close to 2%, while leading energy driller Schlumberger (SLB) shares are off by more than 2% as we near the noon hour, suffering a 52-week low in the process.
With oil down by some 15% since late May, amid predictions that crude will hit $40 a barrel before long, and with the road ahead to permanent tax reform still not well defined, despite optimistic predictions, some traders have seized an opportunity to take money off of the table. The uncertain climate in politically charged Washington is also a factor in the profit taking, one day after the Dow surged ahead by 144 points and the NASDAQ, on strength in technology, did even better. However, today is another day, and it is the bears who now are controlling the ball for a change.
Meanwhile, although there was no major economic releases this morning, following a heavy dose of issuances in the last five-day span, the economy seems to be languishing again, with the latest data on industrial production, capacity utilization, housing starts, and building permits all suggesting that the big bounce earlier forecasted in the current quarter, which had been expected to yield GDP growth on the order of 3%, might prove challenging to attain. Improvement closer to 2.5% in the period now seems to be more realistic as a goal.
As to the Federal Reserve, which last week lifted interest rates for the third time since December and indicated that it would start shrinking its $4.5 trillion portfolio of bonds and other assets this year, the Boston Fed President said that the low interest-rate environment would likely remain in place for some time. That forecast should sit well with investors, who do not seem overly concerned with Fed policy, at this time.
All told, and even with some mildly bearish sentiment in place this morning, stocks are hardly in a major reversal. It appears that the prospect for tax reform, which still looks to be very real according to the Administration, is holding the sellers at bay for now. So as we pass the noon hour in New York, the Dow is off just 10 points; the S&P 500 Index is lower by eight points; and the NASDAQ is down by 26 points. Our sense is that a weaker session is unfolding, but one that probably will wind up being moderate in scope. Stay tuned. – Harvey S. Katz
At the time of this article's writing, the author did not have positions in any of the companies mentioned
Before the Bell
The U.S. equity market got off to strong start this week. The major equity indexes were up sharply at the get-go yesterday and extended those gains as the session progressed, with a pickup in buying into the closing bell. The Dow Jones Industrial Average, the best performing of the large-cap indexes recently, delivered a triple-digit (145 points) advance during the bullish session. The NASDAQ also pressed forward forcefully, rising by 87 points (or 1.4%) and the S&P 500 Index, which had been very much range bound in recent weeks, surged ahead, and along with the aforementioned index of 30 bellwether companies finished at all-time highs. Overall, advancing issues led decliners by around two to one on both the Big Board and the NASDAQ.
There were a few events that pushed the market higher yesterday. Overseas, the investment community cheered the results of France’s parliamentary elections this weekend. The outcome was a win for President Emmanuel Macron’s pro-business agenda, which is viewed as a positive for European companies and their stocks. The news from the Continent had a favorable impact on trading here. As for the homeland, the investment community had a favorable reaction to the meeting of the technology industry leaders with President Trump in Washington. The technology stocks jumped during yesterday’s session.
Not surprisingly, the technology sector provided the leadership among the 10 major equity groups, advancing 1.7% for the day. There also was notable buying in the healthcare, basic materials, and consumer discretionary areas. Conversely, we saw some backtracking in the higher-yielding utilities and telecommunications groups. Hawkish commentary from a Federal Reserve leader weighed some on the higher-yielding issues. An uptick in bond yields would make higher-yielding equities less attractive to income-oriented investors; hence the selling we saw yesterday. A continued retreat in oil prices both here and on the Continent pressured the energy group.
As we noted in yesterday’s pre-market commentary, several Federal Reserve District Presidents were scheduled to speak this week. Leading the brigade was New York Federal Reserve Bank President William Dudley yesterday morning. His commentary was hawkish, though, it did little to take the wind out of the sails of the bulls. The market elected to focus more on the technology news and France’s elections than the monetary policy discussion. Last night, Chicago Federal Reserve Bank President Charles Evans shared a slightly more dovish stance. Mr. Evans said with inflation stubbornly soft despite a more than 15-year low in the U.S. unemployment rate, the Federal Reserve should move only slowly to raise interest rates and trim its massive bond portfolio. The Fed stated last week that it will begin to reduce its massive $4.5 trillion balance sheet later this year via the sale of bonds. In time, the maneuver is likely to push bond yields higher, which may not be good news for either bonds or equities. Right now the market is clearly looking past this issue. The S&P 500 Volatility Index (or VIX), also known as the fear gauge, finished yesterday just above 10, a level that clearly suggests that the market is overheated and could be susceptible to a selloff if the news were to disappoint in the coming weeks. That said…
With less than an hour to go before the commencement of trading stateside, the major equity futures are indicating a mixed opening for the U.S. stock market. So far today, the trading has been mixed overseas. The bulls will be looking to avoid one of those Monday/Tuesday reversals that were commonplace last year. With little economic or earnings news of note due this morning, the bears will have to look at other places, possibly the Federal Reserve or Washington D.C., for something to run with today; neither provided any help yesterday for their cause. 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.
