Equities moved lower again on Wednesday for the third consecutive loss.
The Dow Jones Industrial Average lost 1.6%, the S&P 500 lost 1.5%, the Nasdaq lost 2.4%, and the Russell 2000 lost 2.3%.
The Dow moved back below its 50-day moving average, the first time the key level is in play since the Federal Reserve spurred the bulls on last week by halving its estimate of the number of interest rate hikes it expects this year from four to just two.
Ostensibly, the catalyst for the decline was another batch of disappointing U.S. economic data. This time, it was durable and capital goods orders which all fell more than one%. Orders for non-military capital goods ex-aircraft — a proxy for future business investment spending — suffered its sixth consecutive monthly decline, the longest losing streak since 2012.
Also weighing was a nasty pullback in biotechnology stocks — an area of speculative excitement. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) lost 4.1% in what’s what the worst pullback since April 2014. Semiconductor stocks also were weak, as were financial stocks — a number of which I highlighted as short candidates in a recent post here.
Going forward, as has been the general rule of this bull market, much depends on the Federal Reserve.
You see, generally poor economic news was considered a positive for a liquidity-addicted stock market since it increased the odds of additional monetary policy easing and an extended reign of ultra-low interest rates.
That hasn’t been the case this week as Fed officials have been out in force reinforcing expectations of rate hikes this year and largely dismissing recent economic weakness as weather related and a slump in inflation as caused by transitory factors. This comes as the Atlanta Fed’s GDPNow real-time forecast of Q1 GDP growth falls to just 0.2%.
The concern is that the Fed is not publicly acknowledging the downside risks as the deflationary impulse and economic slump is global: We’ve seen weak economic results out of Japan and China this week, for instance. Moreover, since the beginning of the year there has been 27 separate interest-rate cuts by foreign central banks.
And while there was a weather-related drop in 1Q14 GDP growth into negative territory, the current slump is deeper on some measures — such as the U.S. Citigroup Economic Surprise Index — suggesting that perhaps it’s reflective of structural problems rather than just snow falling in winter.
Stocks, as represented by the NYSE Composite Index, are contending with massive overhead resistance going back to last summer. If the Fed softens its tone, we could see a breakout leading to an easy-money, currency-driven melt-up of the type we’ve seen all across foreign markets this year — in China, Japan, Germany and elsewhere — but has yet to appear in the United States.
If it surprises by hiking rates for the first time since 2006 at its June meeting, thing will get ugly fast.
A more dovish Fed would keep up the positive momentum commodities are enjoying right now with West Texas Intermediate adding 2.9% to close at $48.89 helping energy stocks buck the trend to move 1.2% higher as a sector. Gold gained 0.3%. This is benefiting the ProShares Ultra Silver (ETF) (NYSEARCA:AGQ) recommended to Edge subscribers.