The brewing tech bubble, which I discussed on Friday, frothed a little more on Monday as investors focused on big-tech superstars Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL), and Apple Inc. (NASDAQ:AAPL) while pretty much ignoring the rest of the market.
That’s probably for the best, because there was weakness elsewhere, especially in commodities and related stocks as the U.S. dollar strengthens on Federal Reserve rate hike expectations. Precious metals were slammed in the overnight session, with trading triggering halt circuit breakers not once but twice, before losing 2.3% in U.S. trading to hit a five-year low in what was its eighth consecutive decline. Crude oil fell 1.8% to close at $49.96 — closing below the $50-per-barrel level for the first time since April.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.1%, the Nasdaq Composite gained 0.2%, and the Russell 2000 lost 0.5%.
Technology stocks led the way with a 0.5% gain while energy names led the decliners by falling 1.3%. In earnings news, Morgan Stanley (NYSE:MS) reported an 8.5% drop in quarterly profit driven by a rise in labor costs and taxes. Halliburton Company (NYSE:HAL) reported a 93% profit drop on lower drilling activity.
International Business Machines Corp. (NYSE:IBM) reported strong earnings but weak revenues after the close, pushing shares down 4.8% in after-hours trading. The top line dropped 13.4% from last year in what was the largest pullback since 2009. It also marked the 13th consecutive quarter of falling revenues. With IBM’s heavy weighing in the Dow Jones Industrial Average, the selling could weigh on the broad market on Tuesday.
Fed rate hike expectations were lifted on comments from St. Louis Federal Reserve President James Bullard, who said there was more than a 50% chance of a September rate hike. He added that he is worried investors have been “reaching for yield” in this low rate environment; scrambling for higher returns by making questionable investment decisions.
While the economic calendar is light this week, the team at Capital Economics highlights that the June data was mixed but strong enough to put second quarter GDP growth around 2.8%. Moreover, the unemployment rate of 5.3% is only marginally above the Fed’s 5% to 5.2% estimate of full employment with a forecast that we’ll hit 5% soon at the current pace of job market tightening.
Market breadth remains a point of concern with decliners outpacing advancers by a 2.1:1 margin on the NYSE. Breadth was also negative on the Nasdaq by an even larger margin of 2.3:1. Unless buyers turn this measure around, the recent market rebound should be viewed with skepticism.
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