The U.S. stock market continued to decline amid data on business activity slowdown and investors’ concerns that the Federal Reserve’s aggressive approach to curbing inflation could lead to a recession in the U.S. economy. The day before, the regulator announced the largest rate hike since 1994.
Jones Industrial Average fell 2.42% to close at 29,927 points for the first time since January 2021 and is already down 19% from its highs of January. Twenty-six out of thirty components were negative. American Express (AXP) -5.96%, Nike (NKE) -5.57% and Caterpillar (CAT) -5.44% were the leaders of the fall. Investors’ wealth was preserved by the securities of consumer sector representatives WalMart (WMT) +1.04% and Procter & Gamble (PG) +0.61%, as well as pharma from Merck & Co (MRK) +0.3% and Johnson & Johnson (JNJ) +0.05%.
Traders on the NYSE are already “trying on” new levels on the Dow Jones index. Photo: CNBC
The broad market index S & P 500 and an indicator of the technology sector stocks Nasdaq Composite lost 3.25% and 4.08%, respectively, and the “distance” from the maximum indicators has already reached 24% and 34%. According to JPMorgan Chase, based on a study of the last 11 economic downturns, the S&P assumes already 85% probability of recession in the U.S.
Meanwhile, the percentage of its components trading above their 50-day moving average fell below 5% this week. That’s the lowest since indices fell during the active phase of the coronavirus pandemic, Bloomberg adds to the technical picture.
Statistics released Thursday also pointed to a sharp slowdown in economic activity, CNBC reported. Home construction fell 14 percent in May, far more than the 2.6 percent decline expected by economists surveyed by Dow Jones. The Philadelphia Fed Business Index for June lost 3.3 points, the first decline since May 2020.
On the topic: Economic calendar of macrostatistics
Although oil prices continued to hold near their highs, overall market sentiment continued to put pressure on stocks in the strongest sector of the stock market this year. In this connection, there was a noticeable sale in shares of oil companies.
The U.S.’s largest oil company ExxonMobil (XOM) fell 3.69%, while the energy sector’s vice-champion Chevron (CVX) lost 5.35% of its value. There’s more. Investor losses in shares of ConocoPhillips (COP) and EOG Resources (EOG) exceeded 6%, and losses from investments in Valero Energy (VLO), Devon Energy (DVN) and Hess (HESS) businesses were over 7%.
It’s worth noting that oil company stocks have not lost their investment appeal. They will continue to be the most interesting industry at the moment. The decline in them is nothing more than an attempt to lock in profits on the strongly rising securities of the last half year. Even after the broad market has “moved down” by a quarter and the technology benchmark has lost a good third of its value, energy stocks remain in the plus by tens of percent of their value from the beginning of the year.
For example, the “Big Three” XOM, CVX and COP are in the green yield zone at 43%, 30% and 38%, respectively, and growth in smaller-cap stocks is even more substantial. The same Occidental Petroleum is up +89%.
Why the U.S. stock market continues to decline
Initially, the markets liked the Fed’s plan to raise interest rates by 75 basis points and the potential for additional increases of a similar magnitude. Indices even interrupted a five-day losing streak in that regard in Wednesday’s trading, but sentiment deteriorated again on Thursday. Central banks around the world began taking a more aggressive policy stance, and investors questioned whether the Fed could make a soft landing.
The current decline in markets continues amid an epiphany and acceptance that the Fed has been blatantly late in its action to curb inflation. Rates as a tool should have been used since the end of last year. What is happening now can only be characterized as a “great awakening.
Investors are paying for a world of illusions
The time has come to leave the artificial world of massive injections of liquidity, where everyone is used to zero interest rates, where we do not make rational investments, and do it in ways that do not make sense,” market strategists at Allianz commented on the situation. “We need to get out of this mode, but it’s not going to be easy.”
That’s why, in yesterday’s “Dow Jones ‘follows’ Fed rates” review, we pointed out that things could get even worse in the short term. We cited data from the last eight bear markets, clearly showing not only a potential downside of 10-15% in depth, but also the possible breadth of such phenomena, which could last not just months, but years.