Stocks nosedived as a slew of concerns over trade tensions and an inversion in part of the U.S. yield curve spooked investors.
The S&P 500 (^GSPC) fell 3.24%, or 90.31 points, as of market close, with banking stocks leading declines. The Dow (^DJI) slid 3.1%, or 799.36 points, nearing the lowest levels of the session. The industrial bellwether Caterpillar (CAT) was the index’s worst performer, falling 6.93% to $129.32 per share as uncertainty over U.S.-China trade policy continued to brew. The Nasdaq (^IXIC) fell 3.8%, or 283.08 points.
“It seems to me that there’s lots of technical trading going on. And technical trading is being more headline-driven than it is fundamentally driven,” Jamie Cox, managing partner for Harris Financial Group, said in an interview with Yahoo Finance. “It’s more confusion by the markets about what direction things are actually going to take. In the absence of any clarity the worst case scenario is going to be the one that’s going to get the most attention.”
Equities sharply reversed course after posting a strong session on Monday. Investors’ risk appetite had increased after President Donald Trump and Chinese President Xi Jinping’s meeting over the weekend at the G20 summit produced a 90-day halt to new tariffs, briefly tempering concerns of trade tensions between the U.S. and China.
But skepticism over the exact nature of the U.S.-China trade war ceasefire announced over the weekend overtook early investor optimism for the 90-day tariff hold. The Trump administration and Chinese government have continued to provide conflicting reports over the specific terms agreed upon following the G20 summit over the weekend.
“Markets don’t believe that the deal (Trump) struck with China is as solid as what he suggested it was after the meeting concluded,” Cox said. “Until which time China confirms it, markets are not going to react positively.”
The bond market, for its part, began the month by flashing a recessionary warning sign. An inversion of a section of the U.S. Treasury yield curve occurred for the first time since 2007 on Monday, with the yield on the 5-year Treasury note falling below the yield on the 3-year note. An inversion also occurred between the yields on the 2- and 5-year notes, meaning that investors were paid more to hold the U.S. government debt with the shorter maturity.
This in part helped send equities into a sell-off as investors feared a similar inversion of the closely monitored 2- and 10-year yields. An inversion of the 2- and the 10-year yield has preceded every U.S. recession since World War II. However, the difference between the 2- and the 10-year yield remains upwardly sloped, albeit flattening. As of 4:15 p.m. ET, the difference between the 2-year and 10-year yields narrowed to 11.5 basis points, having hit the lowest level in more than 11 years intraday on Tuesday.
“I think markets are misinterpreting what the yield curve inversion actually means,” Cox said. “You’ve seen banks and other financial institutions really get hit thinking that recession is much closer than what had originally been predicted and that interest rates would not only stop going up but have to be cut, so the reaction of financials has been rather dramatic.”
The SPDR S&P Regional Banking ETF (KRE) tracking shares of regional financial institutions fell more than 20% from its all-time high from June on Tuesday, while shares of national banks including Bank of America (BAC), Morgan Stanley (MS) and Citigroup (C) each closed lower by more than 4% for the session.
Trade was the “linchpin” of Tuesday’s equity selloff, Jim Tierney, chief investment officer of concentrated U.S. growth at AllianceBernstein, said in an interview with Yahoo Finance. “I don’t think you have a yield curve problem unless you have a trade problem,” he added.
“If we have a trade problem, I think that risks bringing a number of developing economies to the brink of recession. It also puts a huge tax of U.S. consumers, and the combination of those two means a pretty meaningful global slowdown, which would indicate that right now the yield curve is correct in terms of where we’re going,” Tierney said. “It really is quite binary.”
STOCKS: Apple gets downgraded again, homebuilder Toll Brothers reports decline in orders
HSBC downgraded shares of Apple (AAPL) to Hold from Buy and cut the price target to $200 from $205. The firm cited moderating iPhone volume and value growth as reasons for the downgrade, adding, “While U.S. markets should remain solid, emerging markets, FX and diversification are headwinds in the short term. Growth in services could be a catalyst for the long term. Valuation looks undemanding, but catalysts are lacking.” Apple has continued to see its stock downgraded by the likes of Bank of America Merrill Lynch, Guggenheim and other firms recently on concerns of weak demand and macroeconomic headwinds. Shares of Apple fell 4.4% to $176.69 each as of market close.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 3, 2018. REUTERS/Brendan McDermid
Toll Brothers (TOL) reported a drop in quarterly orders for the first time in more than four years, overshadowing solid quarterly results for revenue and earnings. The luxury homebuilder said orders, which point to future revenue, dropped 13% to 1,715 units for the three months ending in October, whereas consensus expectations had been for an increase of 6.5%. Net income rose to $311 million, or $2.08 per share, beating estimates of $1.83 per share. Revenue came in at $2.46 billion, surging ahead of Wall Street’s expectations of $2.35 billion. Shares of Toll Brothers fell 1.61% to $32.99 each as of market close, paring some of the morning’s steep losses.
AutoZone (AZO) beat Wall Street’s expectations for earnings and same-store sales, sending shares higher in early trading. The company delivered earnings of $13.47 per share and net income of $351.4 million, beating expectations of earnings per share of $12.25, according to Bloomberg data. AutoZone also said same-store sales, a key metric of retail health, increased 2.7%, beating estimates of a 2% rise. Shares of AutoZone bucked the downward trend of the broader market Tuesday afternoon, rising 6.87% to $881.07 each as of market close.
