Stocks posted their worst single-day drop in months on Wednesday.
The Dow (^DJI) tumbled 3.15%, or 831.83 points, with all 30 component of the blue-chip index finishing in the red. The S&P 500 (^GSPC) fell 3.29%, or 94.66 points for its fifth day of losses and longest losing streak since late 2016 The declines marked the biggest single-day percentage drops for both indices since February. The Nasdaq (^IXIC) slipped 4.08%, or 315.97 points.
“To use an old analogy, markets tend to take the stairs up – but the elevator down,” NYSE MAC Desk’s Ronald Bohlert said in an email.
“[T]here was no primary culprit today, just a whole lot of individual catalysts that came to a head and ushered the crowd to the door,” Bohlert added. “Rising yields, recent selling pressure in the market, some early negative pre-announcements, lingering trade worries, caution ahead of the financials reporting earnings on Friday, the approaching year-end… the stage was set for a couple of tires to finally blowout.”
Yields on the 10-year Treasury note hovered at 3.193%, while the 30-year yield edged higher to 3.375%.
Something “very unusual”
Typically, when stock prices drop precipitously, money moves into the bond market sending yields lower.
“Despite the equity sell-off, there was no move into Treasuries to seek safety,” Bohlert noted. “That’s an interesting dynamic.”
In an email on Wednesday afternoon, Academy Securities’ Peter Tchir said that the S&P 500 falling more than 1.5% and long-term yields rising simultaneously was “very unusual.”
“This is only the 4th time since 1/1/2016 it occurred,” Tchir observed. “Most recently were 2/2 and 2/8 which book-ended the VIX ETN/ETF fiasco.”
Analysts weren’t able to identify a particular event that triggered Wednesday’s sell-off. But the rise in interest rates in recent days is certainly concerning.
“Stock market declines hurt confidence and reduce spending,” Bank of Tokyo-Mitsubishi’s Chris Rupkey said in an email on Wednesday afternoon. “We don’t know who is to blame here, it’s a little like trying to find what or who is responsible for the dangerous hurricane in Florida today. But make no mistake about it, the stock market decline, triggered perhaps by rising bond yields, is just as dangerous.”
Wednesday’s stock selloff was exacerbated after “the high-flying stocks that have propped indices up all year long reversed course,” Jamie Cox, Managing Partner for Harris Financial Group, told Yahoo Finance, citing Amazon and Netflix as two such examples. “Those kinds of stocks had really, really bad days. And that’s actually rather overdue and sort of what you would see in a normal correction,” he said.
Cox added that investors “trying to divine some type of recession activity or worse markets to come” may be off base. “It’s not that at all – this is a correction that needed to happen since those stocks had really gotten ahead of themselves,” he said.
Investors holding more diversified positions will likely benefit from the sell-off as money flows into areas of the market that had been more underrepresented this year, including utilities and staples, Cox said. “Those types of stocks have really not done well this year and should have done better. So as that rotation occurs, that’s what you’re going to see,” he said.
Specialist Gregg Maloney works at his post on the floor of the New York Stock Exchange, Wednesday, Oct. 10, 2018. (AP Photo/Richard Drew)
NEWS: Hurricane Michael strikes Florida
Hurricane Michael, upgraded to a Category 4 storm early Wednesday, has become the most powerful storm to hit the continental United States in decades. Wind speeds reached 155 miles per hour as the storm made landfall in Florida. Duke Energy warned earlier that Hurricane Michael could cause as many as 200,000 power outages in the company’s serviced area in the Florida panhandle, and Bloomberg reported that the storm is expected to cause $16 billion in damages.
The Securities and Exchange Commission said in a statement Wednesday that it is “closely monitoring the impact of Hurricane Michael” on capital markets and investors.
“The dedicated staff of the SEC is preparing to provide support for market participants as Hurricane Michael approaches the Gulf,” SEC Chairman Jay Clayton said in a statement. “While we assess the need to extend deadlines for filings and other regulatory requirements, work to help ensure access to securities accounts, and monitor for storm-related fraud, we encourage all of those in its path to pay close attention to directions from local officials before, during, and after the storm.”
CVS received preliminary approval from the Department of Justice Wednesday for a $69 billion merger with health insurance giant Aetna. The go-ahead hinged on the condition that Aetna sell off its Medicare Part D prescription drug business to appease regulators’ competition concerns about overlap between CVS’s and Aetna’s drug plan businesses. The merger is among the largest healthcare deal to gain antitrust approval from the Justice Department and follows Cigna’s recent $52 billion acquisition of Express Scripts Holding. Shares of CVS (CVS) were up nearly 1% to $80.22 at 11:42 a.m., while Aetna’s (AET) stock was up 1.34% to $206.45 per share.
Sears (SLHD) is said to be planning to file for bankruptcy as soon as this weekend in the wake of an approaching debt payment the struggling retailer may not be able to meet. Sears owner Eddie Lampert has pushed a debt restructuring plan that would help avoid a Chapter 11 filing, but is now focusing on a deal to maintain stakeholders’ value in a court restructuring, Bloomberg reported, citing unnamed people familiar with the matter. Sears’s stock fell 16.83% to $0.49 per share at the end of trading Wednesday.
Tesla (TSLA) is said to be in the process of obtaining land in Shanghai for the electric car-maker’s first factory outside of the United States, Bloomberg reported, citing unnamed people familiar with the plans. Tesla signed a deal with Chinese authorities in July to build a new auto plant in Shanghai, which CEO Elon Musk has said will eventually have the capacity to product 500,000 electric vehicles per year. Musk told analysts and investors during an earnings call in August that it would take about $2 billion of investment for the factory to produce around 250,000 vehicles a year.
Separately, James Murdoch, the outgoing CEO of Twenty-First Century Fox, is reportedly the lead candidate to replace Elon Musk as Tesla’s chairman, the Financial Times reported on Wednesday, citing two people familiar with the matter. Musk reached a settlement with the SEC requiring in part that he step down as chairman of Tesla for at least three years. The settlement came following a lawsuit the SEC filed against Musk alleging he had defraud investors with statements from August that he intended to bring Tesla private with “funding secured.” Shares of Tesla were down 2.25% to $256.88 each at market close Wednesday.
Canada’s cannabis stocks rose following reports that tobacco company Altria (MO) is in talks to acquire a stake in Aphria (APHQF). Altria, the maker of Marlboro cigarettes, is interested in a minority stake in Aphria with the potential of acquiring a majority stake over the longer term, the Globe and Mail first reported. Aphria’s stock rose 15.07% to $15.43 per share at the end of trading Wednesday.
Luxury stocks fell on concern that LVMH, which owns major fashion brands including Louis Vuitton, Christian Dior and Marc Jacobs, may be losing customers in its key markets in China. About one-third of all LVMH revenue comes from Asia. The companies were further hit Wednesday after Morgan Stanley cut its rating on the luxury-good sector to underweight from neutral, citing waning demand from Chinese consumers. Shares of LVMH (MC.PA) fell 7.14% to $265.30 each at market close Wednesday.
ECONOMY: Mortgage applications fall, producer prices inch higher
U.S. mortgage applications fell last week as home borrowing costs rose to their highest levels in more than seven years. The Market Composite index, which measures the volume of mortgage loan applications, fell 1.7% on a seasonally adjusted basis for the week ending October 5, according to a release from the Mortgage Bankers Association. Lower demand for mortgage refinances hampered mortgage lending, with refinance volume down 3% last week.
Producer prices in the U.S. rose 0.2% in September, in line with average economist expectations based on data compiled by Bloomberg. The results, released Wednesday from the Labor Department, represent a turnaround from a 0.1% decline in August and mark the first increase in three months. The core measure excluding food and energy was also 0.2%, in line with expectations, while the alternative core measure excluding trade services, food and energy increased 0.4% month-over-month, exceeding average analyst expectations of a 0.2% rise.
“The trade services component, which measures margins for retailers and wholesalers, rose only 0.1%, after two sharp declines,” Ian Shepherdson, chief economist at Pantheon Macroeconomics said in a note Wednesday. “It remains well below the trend, which is rising, so we look for a big rebound in October.”
