Stocks fell Thursday, led by a sell-off in the tech sector. Retail sales data were strong, but other factors emerged that pressured sentiment.
The S&P 500 fell 0.34%, while the 10-Year Treasury yield also fell to 0.62%.
Tech led the market downward, but the price pressure was still notable elsewhere, too. The tech-heavy Nasdaq fell 0.73%. The NYSE FANG Index fell 1.18%. Investors had moved into tech stocks, selling cyclical value in droves, as virus cases rose, state reopenings paused, and questions lingered over the next round of fiscal stimulus. Innovative tech companies can often grow through economic headwinds. Big tech stocks are now trading at lofty valuations into earnings and the NYSE FANG Index is down about 3.5% in the past several days. Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report, reporting earnings soon, fell 1.98% Thursday.
Still, cyclical stocks performed weakly, even though some of them have been dumped into correction territory since June 8. Large cap oil and banking both fell a bit less than 1%. Jobless claims came in at 1.3 million for the past week, a data point that is flatlining for the past several weeks, not improving, casting doubt over the speed of the economic recovery. Retail sales did come in at a 7% year-over-year increase for June, above estimates of 5%, but that data are backwards looking. The virus situation is worsening across the country and small businesses need another round of the Paycheck Protection Program. Interest rates are already low, so households need more cash grants from the government and Congress is stalling.
Even with the strong retail sales number, the beaten-down large cap consumer discretionary group continues to struggle, down 0.33%.
And Bank of America (BAC) - Get Bank of America Corp Report, while beating revenue and earnings estimates on the back of a volatile trading and investment banking business, did say it set $5 billion of cash aside for credit losses, a negative indicator for consumers and businesses. $4 billion were in reserve builds, above estimates of $1 billion. Protection against poor credit has been a theme in the banks earnings this week.
Another factor pressuring sentiment is Democratic Presidential nominee Joe Biden’s move up in political polls. A Wall Street Journal poll shows 51% voters of voters favor Biden over Trump, which means there’s an incrementally higher likelihood that corporate taxes will rise, which would be an immediate and quantifiable negative to earnings. Biden may impose heavy healthcare regulations and the NYSE Healthcare Index fell 0.4%.
While the election is certainly a factor, the market action Thursday may have more to do with the economic data and outlook. Large cap consumer staples, which investors often favor during economic turbulence, rose a few tenths of a percentage point, even though all sectors, defensive or cyclical, would be impacted by higher taxes.
Here’s what Wall Street’s saying:
Mike Loewengart, Head, Investment Strategy, E*Trade:
"It’s disappointing to see labor market gains moderate as we’re still far away from pre-pandemic levels. And on the retail sales front, we’re seeing a bit of a reality check compared to last month’s record. Though this is a solid read, the unknown is how much more room does retail spending have to run if shutdowns persist. As stimulus money for many Americans is coming into question, we could see some tough times ahead and it remains to be seen how it will effect consumer spending in the long run. With coronavirus cases ticking up, the market could be in limbo until we get a clear sign on unemployment aid and some meaningful news on the vaccine front.”
Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:
"The Federal Reserve on Wednesday released its Beige Book, which gathers information from businesses nationwide. It showed economic conditions improving across the country, but also highlighted some things to worry about amid higher COVID-19 case counts. Some key takeaways were that "economic activity increased in almost all Districts, but remained well below where it was prior to the COVID-19 pandemic," and that "consumer spending picked up as many nonessential businesses were allowed to reopen." Another crucial point was that the Paycheck Protection Program (PPP), through which USD 500bn was loaned to businesses, and loan deferrals by private lenders both "provided many firms with sufficient liquidity for the near term...Many contacts who have been retaining workers with help from the PPP said that going forward, the strength of demand would determine whether they can avoid layoffs." The cutoff for the report was 6 July, so more recent events are not reflected. In our view, fiscal policy measures and continued reopening plans should help keep demand on an upward trajectory. We think stocks ultimately have higher to run, even though the path could be more volatile."
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