U.S. stocks fell victim to the most pronounced profit taking in nearly 7 weeks on Monday, with the S&P 500 declining 0.8% and smaller-cap indexes even more than that. The Dow lost a little more than 100 points (0.6%) off Friday’s record 17280 close. NASDAQ, a laggard last week, was so again on Monday, declining 1.1%. A combination of profit taking, a slight disappointment in existing home sales, and uncertainty relating to China’s economy and economic policies appeared to be behind Monday’s sell-off.
Small-cap stocks came under renewed selling pressure, with declines of 1.2% in the S&P 600 SmallCaps and 1.5% in the Russell 2000. The latter average is now down almost 3% to date in 2014. Social media stocks, fingered by Janet Yellen earlier this year as frothy, saw bigger than average declines, with Twitter, LinkedIn and Groupon each down roughly 2% and Pandora off 5%. Momentum stocks such as Tesla (-3.6%) and Netflix (-3.2%) also sold off on Monday, and Alibaba, last week’s darling IPO, dropped 4% to just under $90 a share.
Commodities prices got hammered Monday following comments over the weekend by Chinese Finance Minister Lou Jiwei to the effect that bolder stimulative economic policies will not be forthcoming. Last week’s reports on retail sales and industrial production in China came in sufficiently weak as to raise market concerns that China will not achieve its 7.5% target GDP growth this year – but apparently not weak enough to prompt more than some modest PBOC loans to China’s top five banks. Copper futures prices fell 5 cents a pound or 2% to $3.04, and other industrial commodities averaged a 0.9% drop. Energy and grains were lower by roughly 0.6%, with WTI quotes on crude oil falling to $91.50 a barrel, lowest since May 2013.
The National Association of Realtors reported today that existing home sales fell 2% last month to a 5.05 million seasonally adjusted annual rate, the first decline after four months of increases. Sales are running ahead of the soft levels of January-April, but are roughly 5% below the six-year peak levels of last summer. Lawrence Yun, NAR chief economist, noted that there was a marked decline in all-cash sales in the latest month, an indication that investors may be stepping away from the market. According to Yun, that may be good news for first-time buyers “now that bidding wars are receding and supply constraints have significantly eased in many parts of the country.” The median price of home resales in August was $220k, up 5% over the past 12 months; one year ago, prices were rising at a 13% year-over-year clip.
Separately, the Chicago Fed’s national activity index, based on 85 monthly indicators of national economic activity, declined to -0.21 in August, where zero is the average value. Last month’s reading on the CFNAI, a coincident index to GDP, was the lowest since January’s; what’s more, July’s reading was revised down from +0.39 to +0.26. From another part of the Federal Reserve System’s research factory, the Atlanta Fed’s GDPNow forecast for Q3 GDP growth is currently running at 3.2%.
With stocks under pressure virtually everywhere, bond prices rallied Monday, although most of the gains came in short- to mid-range notes. The long Treasury ticked down a few 32nds in price, and the 30-year TIPS lost two-thirds of a point, its yield rising 3 basis points to 1.13%. The pound (+0.5%), the euro (+0.2%) and the yen (+0.2%) all firmed against the dollar. After markets closed, the Treasury announced several executive actions designed to limit the use of so-called tax inversions to reduce corporate taxes owed to the United States. How effective these actions will be and whether there will be legal challenges remain to be seen.
Reports/dates/facts/links to watch for over the next week:
- September 23: Flash PMI reports for European nations and Eurozone (September); U.S. same store sales for latest week; U.S. FHFA home price index (July).
- September 24: New home sales (August); German Ifo Survey (September).
- September 25: U.S. durable goods orders (August); weekly unemployment claims.
- September 26: Second-quarter GDP, first revision; University of Michigan consumer sentiment index (September).
Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.