Closing Stock Market SummaryThe S&P 500 dropped 3.6% on Thursday in a terribly disappointing session. The Nasdaq Composite (-5.0%) and Russell 2000 (-4.0%) sold off even more than the benchmark index while the Dow Jones Industrial Average fell 3.1%.
The most startling aspect of today's session was that yesterday's huge, post-FOMC rally was wiped out within the first hour of action. Aside from an uptick into the close, there was little interest to buy the dip and a lot of interest to hedge against further downside -- the CBOE Volatility Index spiked 22.7% to 31.20.
Selling was broad-based: all 11 S&P 500 sectors closed lower with losses ranging between 1.1% (utilities) and 5.8% (consumer discretionary), all 30 Dow components closed lower, and declining issues outpaced advancing issues by an 8:1 margin at the NYSE.
The behavior of the Treasury market was one source of angst for the stock market, especially the growth stocks with the 10-yr yield rising 15 basis points to 3.07% (hit 3.10% intraday) on pestering inflation expectations. The Vanguard Mega Cap Growth ETF (MGK 202.91, -11.00) fell 5.1%.
Inflation angst was exacerbated by a larger-than-expected 11.6% jump in preliminary unit labor costs for the first quarter (Briefing.com consensus 7.3%). This transpired during a slower growth quarter, of course, in which preliminary nonfarm productivity fell 7.5% (Briefing.com consensus -2.8%).
Strikingly, there remained a disconnect between the fed funds futures market and Fed Chair Powell's rate expectations. The former, according to the CME FedWatch Tool, was assigning an 87.1% probability for a 75-basis-point hike in June despite Mr. Powell's indication of that not being actively discussed.
The 2-yr yield, which is most sensitive to changes in the fed funds rate, jumped 11 basis points to 2.72% after dropping 15 basis points yesterday. The U.S. Dollar Index rose 0.9% to 103.50. WTI crude futures increased 0.2%, or $0.23, to $108.20/bbl.
A separate source of angst was disappointing earnings and/or guidance from e-commerce companies Shopify (SHOP 413.09, -72.40, -14.9%), eBay (EBAY 48.04, -6.38, -11.7%), Etsy (ETSY 90.93, -18.40, -16.8%), and Wayfair (W 67.45, -23.31, -25.7%).
Booking Holdings (BKNG 2171.91, +68.58, +3.3%) was one of the few positives today with an observation that gross travel bookings for the summer are currently running 15% higher than in 2019. BKNG beat top and bottom-line estimates.
Reviewing Thursday's economic data:
- The weekly initial claims report showed jobless claims for the week ending April 30 rising by 19,000 to 200,000 consensus 184,000). Continuing claims for the week ending April 23 decreasing by 19,000 to 1.384 million, which is the lowest since January 17, 1970.
- The key takeaway from the report is that initial claims are still running near historically low levels that point to tightness in the labor market and the likely persistence of wage-based inflation pressures.
- Nonfarm business sector labor productivity decreased 7.5% in the first quarter (consensus -2.8%) following a downwardly revised 6.3% increase (from 6.6%) in the fourth quarter. Unit labor costs soared 11.6% (Briefing.com consensus 7.3%) following an upwardly revised 1.0% increase (from 0.9%) in the fourth quarter. The first quarter decline in productivity is the largest since the third quarter of 1947.
- The key takeaway from this report is that it's a reflection of weak economic activity and rising labor costs that threaten corporate profit margins.
Looking ahead, investors will receive the Employment Situation report for April and the Consumer Credit report for March on Friday.
- Dow Jones Industrial Average -9.2% YTD
- S&P 500 -13.0% YTD
- Russell 2000 -16.7% YTD
- Nasdaq Composite -21.3% YTD