Closing Stock Market SummaryThe S&P 500 dropped 3.5% on Thursday in an orderly retreat led by the mega-caps and growth stocks. The Nasdaq Composite underperformed with a 5.0% decline due to its greater exposure to these names, while the Dow Jones Industrial Average (-2.8%) and Russell 2000 (-3.0%) declined about 3%.
There were no macro catalysts attributed to today's steep decline, suggesting that profit taking and price exhaustion were likely factors in cooling off the market that many investors had described as overheated. Losses were broad, evident by all 11 S&P 500 sectors closing in negative territory, but there was a relative divergence between the losers.
A bulk of the losses were found in the high-momentum stocks within the information technology (-5.8%) and consumer discretionary (-3.6%) sectors, which were the only sectors that declined more than the S&P 500. The Philadelphia Semiconductor Index fell 5.7%.
The value-oriented spaces, like the energy sector (-0.7%), declined the least. To better illustrate this relative outperformance, the Russell 1000 Value Index declined 2.1% versus a 4.9% decline for the Russell 1000 Growth index. Not much consolation for investors, though, given growth and value both declined noticeably.
Whether these losses materialize into a steeper correction in the coming days is uncertain, but the absence of a buy-the-dip mentality likely exacerbated fears of further weakness in equities. The CBOE Volatility Index, which is widely seen as a fear gauge and representation of hedging activity, spiked 26.5% to 33.60.
Separately, Chicago Fed President Evans (FOMC voter in 2021) was the latest Fed official to subtly urge lawmakers for more fiscal relief. Mr. Evans also suggested that economic activity might not return to pre-pandemic levels until late-2022 and doesn't expect inflation to pick up in the near future.
U.S. Treasuries ended the day on a higher note, as investors assumed some safety amid the weakness in stocks and lingering growth concerns. The 2-yr yield declined one basis point to 0.12%, and the 10-yr yield declined three basis points to 0.62%. The U.S. Dollar Index declined 0.1% to 92.73. WTI crude futures declined 0.5%, or $0.20, to $41.34/bbl.
Reviewing Thursday's economic data:
- Initial claims for the week ending August 29 decreased by 130,000 to 881,000 (consensus 915,000), which is the lowest they have been since the week ending March 14. Continuing claims for the week ending August 22 decreased by 1,238,000 to 13.254 million.
- The key takeaway from the report is that initial claims were the lowest they have been since the COVID pandemic hit the U.S. economy in force in mid-March. That has fostered some confidence in the view that, even with initial claims still alarmingly high, the economy continues to heal from that impact.
- The ISM Non-Manufacturing index for August slipped to 56.9% (consensus 56.7%) from 58.1% in July.
- The key takeaway from the report is that it featured a notable slowing in the New Orders Index (56.8% from 67.7%) and a notable pickup in the Prices Index (64.2% from 57.6%).
- Q2 Productivity growth was revised to an annualized 10.1% (Briefing.com consensus 7.0%) from the advance estimate of 7.3%. Unit labor costs were up 9.0% (consensus 12.6%) versus the advance estimate of 12.2%.
- The key takeaway from the report is that the huge productivity gain (largest since Q1 1971) is only formulaic as opposed to a true picture of strength. To wit, output declined 37.1% (largest on record) while hours worked fell 42.9% (largest on record).
- The July trade deficit widened to $63.6 billion (consensus -$58.6 billion) from a downwardly revised $53.5 billion (from -$50.7 billion) in June. Exports were up $12.6 billion from June while imports were up $22.7 billion.
- The key takeaway from the report is that exports and imports both rose, which is consistent with a global economy in recovery mode.
Looking ahead, investors will receive the Employment Situation Report for August on Friday.
- Nasdaq Composite +27.7% YTD
- S&P 500 +6.9% YTD
- Dow Jones Industrial Average -0.9% YTD
- Russell 2000 -7.4% YTD