Wall Street closed sharply lower on Monday as volatility continues to pull down U.S. stock markets in October. Market participants rotated their funds from growth-oriented technology to cyclical reopening stocks on concerns of higher interest rate. Expectations for more inflationary pressure due to higher oil prices and Congressional impasse on debt ceiling issue significantly dented investors’ sentiment. All three major stock indexes ended in red.
How Did The Benchmarks Perform?
The Dow Jones Industrial Average (DJI) slid 0.9% or 324.54 points to close at 34,002.92. Notably, 6 components of the 30-stock index ended in the green while 24 in red. The tech-heavy Nasdaq Composite finished at 14,255.48, tumbling 2.1% or 311.21 points due to weak performance by large-cap technology stocks.
Meanwhile, the S&P 500 dropped 1.3% to end at 4,300.46, marking its lowest close since Jul 19. Nine out of eleven sectors of the benchmark index closed in negative territory and two in green. The Technology Select Sector SPDR (XLK), the Communications Services Select Sector SPDR (XLC) and the Health Care Select Sector SPDR (XLV) plunged 2.3%, 2.2% and 1.5%, respectively. On the other hand, the Energy Select Sector SPDR (XLE) and the Utilities Select Sector SPDR (XLU) gained 1.6% and 1.4%, respectively.
The fear-gauge CBOE Volatility Index (VIX) was up 8.6% to 22.96. A total of 11.1 billion shares were traded on Monday, lower than the last 20-session average of 10.8 billion. Decliners outnumbered advancers on the NYSE by a 1.92-to-1 ratio. On Nasdaq, a 2.62-to-1 ratio favored declining issues.
Technology-Driven Pullback
Yesterday’s market meltdown was predominantly technology-sector driven. The yield on the 10-year U.S. Treasury Note was up 1.7 basis points to 1.481%. This yield was hovering around 1.56% last week, its highest since June.
Fed Chairman Jerome Powell has given signal of a possible tapering of the central bank’s $120 billion per month bond-buy program this year. Inflationary pressure remains elevated as the core PCE price index – Fed’s favorite inflation gauge – came in at 30-year high in August. Going forward, inflation will remain high due to higher oil prices and prolonged supply-chain disruptions.
A reduction of government bond purchase will reduce the price of bonds and therefore bond prices will fall. Consequently, yield to maturity on government bond will increase. Higher market risk-free return will be detrimental to growth stocks, especially technology stocks. These stocks generally provide strong cash flow in future. Therefore, higher discount rate will reduce the net present value of investment in these stocks.
Moreover, growth-oriented companies depend on easy access to cheap credit in order to grow their businesses. The Fed has also hinted that the first rate hike after March 2020 may take place in the second half of 2022, well before late 2024 predicted at the beginning of this year. Higher interest rate will raise the cost of funds for growth companies.
Consequently, shares of technology behemoths like Apple Inc.
AAPL
, Microsoft Corp.
MSFT
and NVIDIA Corp.
NVDA
tumbled 2.5%, 2.1% and 4.9%, respectively. Microsoft and NVIDIA carry a Zacks Rank #2 (Buy). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
Crude Oil Prices Surge
Oil prices rallied on Monday following the decision of the OPEC and Russia-led consortium that production will increase in measured steps, gradually each month, including 400,000 barrels a day increase in November.
As a result, the price of the U.S. benchmark West Texas Intermediate rose 2.3% to $77.62, marking the highest in seven years, and the price of global benchmark the Brent crude was up 2.5% to $81.26, highest since 2018.
U.S. Government Debt Ceiling Issue
President Joe Biden has warned that the U.S. government will face the risk of defaulting on its own debt unless the Congress raise the Federal borrowing limit by Oct. 18. This may lead to severe economic recession. The Congressional Budget Office has already said that government most likely will run out of cash near the end of October or beginning of November if lawmakers fail to raise or suspend the debt limit.
Economic Data
The Department of Commerce reported that factory orders increased 1.2% in August beating the consensus estimate of 1%. July’s data was revised upward from 0.4% to 0.7%. The core factory orders (excluding transportation-related orders) grew 0.5% in August.
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