S&P 500 has worst day since April after big rally
This year’s $6.5 trillion rally in stocks hit a wall, following hot jobs data and a ramp-up in Treasury issuance just a day after a U.S. credit downgrade by Fitch Ratings.
Equities fell across the board, with the S&P 500 notching its worst day since April. The tech-heavy Nasdaq 100 dropped 2% after a surge that topped 40% this year amid the artificial-intelligence frenzy. Nvidia and Tesla sank at least 2.7%. Wall Street’s so-called fear gauge, the VIX, climbed the most in almost five months. Ten-year yields hit the highest since November, while the dollar rose against all of its developed-market peers.
In late trading, Qualcomm, the largest maker of smartphone processors, gave a tepid revenue forecast for the current period, indicating that demand for mobile devices remains weak even as the industry emerges from a glut.
To Dan Wantrobski at Janney Montgomery Scott, the stock market is seeing a “high-level consolidation” after a rally that included overbought conditions, bullish sentiment and generally thinner breadth readings.
“While consolidation is generally considered a healthy phase on the way to resumption of previous trend, our outlook for the second half of 2023 has not changed materially at this time,” Wantrobski noted. “We are still on watch for a deeper correction.”
He also expects more volatility over the next several months triggered by any number of potential catalysts such as Federal Reserve policy, rate volatility and tightening liquidity.
Wall Street traders also had something else to worry about – a steeper yield curve – with rates on longer-term bonds rising faster than rates on shorter-term maturities.
Whenever the U.S. curve has steepened in a significant way from an inverted position over the past 50 years, it has been followed by a meaningful drop in the equity market, according to Matt Maley at Miller Tabak.
“With this in mind, we’re not worried about the downgrade impact,” Maley noted. “There are some developments to be concerned about, including the recent rise in Treasury yields. The steepening of the yield curve – from an inverted position – is bearish, not bullish for the stock market.”
The steepening of the yield curve extended a trend since the Bank of Japan last week surprised markets with a policy tweak. At 4.92%, two-year yields are 82 basis points higher than those of the 10-year note.
That’s compared to a gap of 102 basis points two weeks ago.