U.S. equities meandered beneath the unchanged line on Wednesday, shell-shocked from Tuesday’s big 1%-plus decline — the most significant pullback for the market since October. This put an end to an incredible uptrend for the market, given that the Bespoke Investment Group finds that 1% declines historically occur 10% of the time.
In the end, the Dow Jones Industrial Average lost a fraction, the S&P 500 gained 0.2%, the Nasdaq Composite gained 0.5% and the Russell 2000 lost 0.1%. Treasury bonds were stronger, the dollar gained, gold rose 0.3% and oil lost 0.4% after a larger-than-expected U.S. inventory build. That boosted the ProShares UltraShort Crude Oil (NYSEARCA:SCO) to a total gain of nearly 22%.
Technology stocks led the way with a 0.8% gain while telecoms were the laggards, down 1%. Silver Wheaton Corp. (USA) (NYSE:SLW) lost 7.4% on a quarterly earnings per share beat with revenues around 5% ahead of estimates. Winnebago Industries, Inc. (NYSE:WGO) gained 6.3% despite an operating earnings miss as revenues game in around 9% ahead of estimates thanks to a 3.6% increase in motorized RV deliveries. FedEx Corporation (NYSE:FDX) gained 2.1% on a revenue surprise.
Sears Holding Corp (NASDAQ:SHLD) fell 12.3% after its annual report noted “substantial doubt” about its ability to continue as a going concern. It added that recent efforts to unlock value will help liquidity needs over the next 12 months, but the long-term outlook remains uncertain. Nike Inc (NYSE:NKE) fell 7.1% after a fiscal Q3 earnings beat was marred by a reliance on tax effects to offset weak margins. Future orders declined again and forward guidance was soft.
The catalyst for Tuesday’s pullback was growing fears the healthcare reform legislation supported by President Trump is hitting resistance in Congress from conservative Republicans — a possible sign his agenda will be slower in coming than the Wall Street priced in. The legislation is reportedly moving to a vote in the House of Representatives on Thursday.
If things like tax reform and deregulation are going to stall — hopes for which drove the valuation-extending market surge of the past few months despite tepid earnings — then stocks suddenly look expensive. Thus, the selling pressure.
Also weighing is the continued hawkishness from the Federal Reserve in the wake of last week’s rate hike. The second tightening in three months represents a dramatic increase in pace from the two hikes seen over the past ten years. Although, the Fed officially has two further hikes penciled in through the end of the year, the market’s bullish response to last week’s interest rate hike raised fears of a more aggressive push against overconfidence and valuation froth.
Today, Cleveland Fed President Mester said she envisaged more than three hikes for 2017 and said she was comfortable beginning the process of balance sheet normalization. Boston Fed President Rosengren warned about the rise of surging commercial real estate prices.
And in an interview with Reuters, Dallas Fed President Kaplan said two further rate hikes this year was a reasonable assumption and said the Fed was approaching a time when it could “gradually and patiently” normalize its balance sheet from years of aggressive bond buying.
Watch for more hawkishness when Federal Reserve Board Chair Janet Yellen makes remarks at a conference in Washington D.C. Thursday morning.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers. Redeem by clicking the links above.