Stocks Extend Last Week's Losses on Tech Weakness
February 20, 2024
schwab.com
The Nasdaq Composite fell near its lowest level in two weeks as investors waited for key chipmaker earnings.
(Tuesday market close) Investors returned from a three-day weekend and sent major U.S. equity benchmarks lower Tuesday, with the Nasdaq Composite® (COMP) dropping to a two-week low amid sharp declines in semiconductor companies ahead of industry leader Nvidia's (NVDA) highly anticipated quarterly results Wednesday.
The Dow Jones Industrial Average® also fell despite a strong performance by member Walmart (WMT), whose shares surged 3.2% after reporting better-than-expected quarterly earnings early Wednesday. Other big names grabbed headlines, including Discover Financial (DFS), which soared over 12% after the credit card issuer agreed to be bought by Capital One (COF) for $35.3 billion in an all-stock deal. Capital One rose about 0.1%
Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, noted that while technology has been one of the market's strongest performers so far this year, recent chart patterns suggest the sector may be undergoing a reversal lower. That may have encouraged some selling in technology ahead of Nvidia's earnings.
"Near-term trend reversal signals combined with bearish seasonality for technology perhaps encouraged some traders to take tech profits ahead of Nvidia's results" Peterson said. He added a recent jump in S&P 500 volatility "possibly reflects growing uncertainty" over interest rates and the economy.
Here's where the major benchmarks ended:
- The S&P 500® index (SPX) fell 30.06 points (0.6%) to 4,975.51; the Dow Jones Industrial Average lost 64.19 points (0.2%) to 38,563.80; the Nasdaq Composite declined 144.87 points (0.9%) to 15,630.78.
- The 10-year Treasury note yield (TNX) fell about 2 basis points to 4.275%.
- The Cboe Volatility Index® (VIX) rose 0.71 to 15.42.
Nvidia shares fell 4.4%, weakness that helped drag down shares of other chipmakers and contributed to a drop of 1.6% in the Philadelphia Semiconductor Index (SOX), which ended near a two-week low. Energy shares also took pressure as WTI crude oil futures (/CL) sank 1.6%. Small caps were also soft, as the Russell 2000® Index (RUT) dropped 1.4%.
Despite Tuesday's loss, the Russell 2000 gained 1.1% last week while the S&P 500 fell 0.4%. Schwab's Peterson said he's "encouraged by the recent relative strength in the small-cap benchmark and how this suggests a broadening of the rally in stocks."
"What stands out to me about the Russell 2000, he added, "is the relative strength that it has been exhibiting over the past couple of weeks despite rising bond yields. If the index can break out above December's high (2,066) this could be an encouraging development for the bulls."
Stocks on the move
The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:
- Alaska Air Group (ALK) gained more than 3% after Deutsche Bank upgraded the stock to "buy" from "hold," citing expectations U.S. airlines may benefit from easing of last year's domestic oversupply. The bank also upgraded JetBlue (JBLU), and Southwest (LUV), whose shares rose 1.51% and 0.24%, respectively.
- Barclays (BCS) rallied 12% after the British bank announced an operational restructuring that will include cost cuts and said it will also buy back shares.
- Caterpillar (CAT) fell 2.5% after Evercore ISI downgraded the Dow member to "in line" from "outperform," saying it's "prudent to take profits in the machinery space following the post-earnings rallies."
- Home Depot (HD) gained less than 1% by the close after the home improvement retailer reported fourth-quarter earnings and revenue that topped expectations and forecast a 1% increase in full-year sales.
- Medtronic (MDT) gained 1.05% after the medical device company's quarterly earnings and revenue exceeded analysts' expectations.
- Transocean (RIG) tumbled 4.61% after the offshore drilling rig operator reported a fourth-quarter net loss of $74 million, despite a 4% gain in revenue.
- US Foods Holding (USFD) added 0.58% after Piper Sandler upgraded the food distributor to "overweight" from "neutral," citing strength in the U.S. economy.
In addition to Nvidia, other major companies expected to report quarterly earnings Wednesday include utility Exelon (EXC), energy producer Marathon Oil (MRO), miner Rio Tinto (RIO), and electric vehicle maker Rivian Automotive (RIVN).
Bright spots in LEI report
The market is coming off a week that delivered unwelcome news on inflation, after the Labor Department's Consumer Price Index (CPI) and Producer Price Index (PPI) both posted higher-than-expected readings for January.
The numbers fueled renewed worries inflation may be perking up from a mostly downward path during 2023 and prompted investors to sharply rein in expectations for imminent interest rate cuts from the Federal Reserve.
Closely followed core CPI, which excludes volatile food and costs, rose a higher-than-expected 3.9% from January 2023, nearly double the Fed's long-term 2% inflation target. That means any near-term Fed rate cuts are unlikely, analysts believe. Many analysts now see an initial rate cut happening in June at the earliest.
This week's economic calendar is relatively light. But numbers reported Tuesday suggested the economy has slowed but remains on firm footing.
Earlier Tuesday, the Conference Board's December Leading Economic Index® (LEI) posted a drop of 0.4% for January, slightly larger than expected and the 22nd consecutive monthly decline, a pattern that historically has preceded recessions.
The January LEI decline in part reflected a drop in hours worked in manufacturing, though six of the 10 data points used to calculate the LEI were positive for the month. That prompted the Conference Board to rescind its previous prediction for a recession in 2024.
"While the declining LEI continues to signal headwinds to economic activity, for the first time in the past two years, six out of its ten components were positive contributors over the past six-month period," Conference Board economist Justyna Zabinska-La Monica said in a statement.
"As a result, the leading index currently does not signal recession ahead," she added. While the Conference Board no longer forecasts a recession in 2024, it does expect real GDP growth to slow to near zero percent over the second and third quarters.
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