U.S. equities suffered their worst decline since the post-Brexit wipeout on Tuesday amid ongoing concerns over the ramifications of fresh weakness in crude oil and disappointment with the size of a fiscal stimulus package announced by Japan overnight.
There result was the seventh straight loss for large-caps, ending the longest period of quiet trading in 21 years as we head into one of the weakest periods of market seasonality of the year.
In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 Index lost 0.6%, the Nasdaq Composite lost 0.9% and the Russell 2000 lost 1.4%. Treasury bonds were mixed, the dollar was weaker, gold gained 1% to hit its highest level in more than two years and crude oil lost 1.4% as it fell below the $40-a-barrel level.
Crude oil has been hit by the reemergence of oversupply concerns amid an inventory glut in gasoline that is pressuring refinery margins and slowing cracking activity, pushing the inventory backlog up the supply chain.
Production is ramping up as short-term supply disruptions fade everywhere from Nigeria to Libya. Iran is aggressively increasing production thanks to the lifting of export sanctions. Russian production rose 1.8%. And Saudi Arabia is showing no signs of backing off of its effort to recapture market share via lower prices.
A late-day rebound in oil boosted energy stocks in a big way. But the trend remains to the downside and much damage has already been done. Keep an eye on bank stocks, which look vulnerable to a pullback here as fears over rising energy bond default risks return. Edge Pro subscribers are enjoying a 326% gain in their August $94 Exxon Mobil Corporation (NYSE:XOM) puts and recently added put option exposure in a major Wall Street bank.
Consumer discretionary stocks led the way down, with retailers getting hit hard on concerns cautious comments from automakers is reflective of a broad spending slowdown (remember, consumer spending is the only thing keeping GDP growth in positive territory at the moment). General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) both fell more than 4% after reporting weaker-than-expected sales numbers for July.
Other areas of weakness included cruise lines, airlines and restaurants. Royal Caribbean Cruises Ltd (NYSE:RCL) lost 6.3% despite reporting an earnings beat on lower guidance. Delta Air Lines, Inc. (NYSE:DAL) lost 7.8% on a drop in margins amid ongoing evidence of industry overcapacity. And Texas Roadhouse Inc (NASDAQ:TXRH) dropped 12.4% on concerns about wage pressure and valuations.
Back to Japan. Tokyo unveiled a ¥28T stimulus plan, but only a portion (¥7.5T) includes new spending for things like infrastructure building. The takeaway, based on headlines that followed, is that Prime Minister Abe prefers the Bank of Japan (which disappointed last week with a “no change” decision and the announcement of a study of the effectiveness of its policy tools) to act even more aggressively to boost inflation.
The overall impression is of a tepid and uninspired policy response, not just by Japan but by the Bank of England and the European Central Bank to the surprise “Leave” Brexit result.
With hopes of a massive new monetary policy stimulus well and truly faded, hard realities like lower oil prices, uneven U.S. economic data, whiffs of inflation, a rate-hike taunting Fed and an ongoing earnings recession are dragging stocks away from recent highs and out of low volatility, dream-like state.
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.
