Large-cap stocks dropped for the third consecutive session Friday — marking the sixth down day in the past eight trading days — as markets felt the weight of a combination of fears over a December Federal Reserve rate hike coupled with disappointing economic data.
In the end, the Dow Jones Industrial Average lost 1.2%, the S&P 500 dropped 1.1%, the Nasdaq Composite fell 1.5% and the Russell 2000 lost 0.7%. Materials led the way with a 1.2% gain while consumer discretionary stocks brought up the rear, down 2.7%.
Further, treasury bonds strengthened, the U.S. dollar bulked up, gold remained largely stagnant and oil declined on inventory worries, losing 2.3% to close at $40.79 a barrel.
The latest report from the International Energy Agency estimates that global demand growth will probably slow to 1.2 million barrels per day in 2016, after hitting a 5-year high of 1.8 million barrels per day in 2015. Also weighing were reports of the first increase in U.S. drilling rig counts in 11 weeks.
Energy stocks took a hit, with Exxon Mobil Corporation (NYSE:XOM) falling 1.7%. That boosted the November $80 puts recommended to Edge Pro subscribers to a gain of 44% since they were recommended on Thursday.
Nordstrom, Inc. (NYSE:JWN) lost 15% after earnings per share missed by over 20% on comp-store sales growth of 0.9% (vs. the 3.6% analysts were expecting). GameStop Corp. (NYSE:GME) dropped 16.5% after the video game retailer was downgraded by Pacific Crest analysts on weak October sales data and the ongoing struggle for growth in physical software as digital delivery becomes increasingly important.
Mylan NV (NASDAQ:MYL) gained 12.9% after it was reported that the company failed to secure enough shares to win a hostile bid for Perrigo Company plc Ordinary Shares (NYSE:PRGO), which fell 6.2%. Yelp Inc (NYSE:YELP) gained 4.6% after it was upgraded to outperform by analysts at RBC. And YUM Brands, Inc. (NYSE:YUM) gained 3.5% on solid October sales in China, with comp-store results up 5% vs. the 1% analysts were expecting.
On the economic front, headline producer price inflation fell 0.4% on a month-over-month basis, well below the 0.2% increase expected. The 1.6% year-over-year decline was the steepest bout of deflation since at least 2009. Meanwhile, food prices were down 0.8%; retail reported weak sales up 0.1% month-over-month in October vs. the consensus estimate for a 0.3% rise.
In the context of constant reassurances from the Fed that a December rate hike is coming (something that hasn’t happened since 2006), the soft data was enough to stop bulls in their tracks.
More economic data is coming next week with the Empire State Manufacturing Survey on Monday, the consumer price index and industrial production on Tuesday and the release of the Oct. 27-28 Federal Reserve minutes on Wednesday.
The hurdle for not hiking next month has been set high, and will thus require a very weak November employment report early next month, according to Deutsche Bank economists. We’re taking a sub-100,000 headline payroll gain vs. the 271,000 gain reported for October and the six-month average of around 215,000.
As a result, defensive plays are doing best in their environment: The VelocityShares 2x VIX (NASDAQ:TVIX) position recommended to Edge subscribers last Friday is already showing a gain of nearly 41%.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
