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Two Headwinds Keeping Stocks Down Thursday

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Stocks fell harshly Thursday, as Democratic Presidential nominee Joe Biden widened his lead over President Trump in the polls and banks’ loan loss provisions continued to look ugly. 

All three major U.S. indices were down considerably, with the S&P 500 down 0.9% and the 10-Year Treasury yield down to 0.61%. 

Biden rose to 51% favorability among voters, according to a Wall Street Journal and NBC poll. That’s up 11 percentage points from the last reading. Biden poses the threat of higher corporate taxes, which may go all the way to his preferred 28% if the Democrats also take the majority of the Senate. 

The current tax rate is 21%. The stock market has risen even with Trump’s election chances falling since march, although that is because of the apparent economic recovery. Biden is a somewhat business-unfriendly president. Biden may also pose stringent regulations on healthcare and the NYSE Healthcare Index fell 0.5%. 

Another headwind for the economy, Bank of America  (BAC) - Get Bank of America Corp Report reported earnings Thursday and showed a reserve build of $4 billion, versus $1 billion expected and $5 billion of total loan loss provisions. That’s cash banks set aside to absorb potential credit losses. The stock fell almost 4%. The heavy loan loss provisions are a negative indicator for credit, and for many banks reporting this quarter, that credit weakness is seen in the consumer. 

For the immediate, the consumer has shown strength. 

Retail sales for the month of June rose 7.5% year-over-year versus estimates of 5.2%. This data continues to point to fast recovery, as consumer spend has been aided by easier financial conditions and fiscal stimulus to small businesses and households. But as investors showed little confidence Thursday, large cap consumer discretionary stocks were falling more than 1%. 

Plus,"Though this is a solid read [retail data], the unknown is how much more room does retail spending have to run if shutdowns persist,” wrote Mike Loewengart, head of investment strategy at E*Trade in emailed remarks to reporters. "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."

Even with the selling in other cyclical stocks like oil and industrials, stocks were mostly lead down by tech. The Nasdaq fell more than 1%. Big tech ran up in the past month-and-a-half, as investors were looking for secular growth drivers that could power through economic and virus-related headwinds.

Now, earnings are coming in and they’re met with sky-high high valuations. Apple  (AAPL) - Get Apple Inc. (AAPL) Report and Amazon  (AMZN) - Get Amazon.com, Inc. Report both fell about 1%. Netflix  (NFLX) - Get Netflix, Inc. (NFLX) Report, down about 5% in the past few days, fell another 0.3% ahead of earnings after the bell Thursday. 

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