U.S. equities were hit hard on Tuesday as traders returned from the long Labor Day holiday weekend, pushing stocks back toward the mid-August lows. With summer vacations over, children back in school and September’s history as the single worst month of the year for stocks seasonally speaking, traders were already on edge.
Increasing bluster from North Korea — including claims its detonated a hydrogen bomb this weekend — as well as a worsening political rancor in Washington — as Trump pulled the plug on the “DACA” program — provided the impetus to sell. Apprehension over the approach of Hurricane Irma toward Florida, carrying the strongest-ever winds recorded for an Atlantic basin storm, didn’t help either.
And sell they did. In the end, the Dow Jones Industrial Average lost 1.1%, the S&P 500 lost 0.8%, the Nasdaq Composite lost 0.9% and the Russell 2000 lost 1%. Treasury bonds were stronger, the dollar weakened, gold gained 1.1% and oil gained 2.9% as traders reacted to news of a possible extension of OPEC’s oil output freeze deal.
Breadth was negative, with decliners outpacing advancers by a 2.3 to 1 ratio on heavy volume, with NYSE activity at 121% of the 30-day average. Energy stocks led the way with a 0.6% gain while financials were the laggards, down 2.2%.
United Technologies Corporation (NYSE:UTX) fell 5.7% after confirming a deal to acquire Rockwell Collins, Inc. (NYSE:COL) in a $30 billion deal. Viacom, Inc. (NASDAQ:VIAB) fell 4.6% after being downgraded by Wells Fargo analysts citing lower affiliate fee growth. And Delta Air Lines, Inc. (NYSE:DAL) fell 3.5% after cutting forward revenue forecasts and margin guidance on higher fuel prices.
Conclusion
Aside from wildcards like Pyongyang’s nukes and Hurricane Irma’s winds and rain, it’s going to be all about policy risk this month.
On the fiscal front, Trump’s DACA decision throws a monkey wrench into the already jammed machinery of Congress with just weeks to go until the debt ceiling is hit. Hairy issues like tax reform, Hurricane Harvey relief, and the budget will need to be dealt with.
But now, all that’s coming out of Washington D.C. is loud screeching.
And on the monetary policy front, this week will feature a heavy calendar of speeches by Federal Reserve officials ahead of a possible decision on “quantitative tightening” later this month. It starts with Governor Lael Brainard, Minneapolis Fed President Neel Kashkari and Dallas Fed President Robert Kaplan all speaking on Tuesday. This will be followed by Cleveland Fed President Loretta Mester, New York Fed President William Dudley and Kansas City Fed President Esther George on Thursday.
Focus will fall most intensely on Brainard and Dudley, as they are scheduled to discuss the economic outlook and monetary policy. When Brainard last spoke on July 13 she said it would be appropriate “relatively soon to commence the gradual and predictable process of allowing the [$4.4 trillion] balance sheet to run off.” Dudley told the AP in a recent interview that he believes tighter labor market conditions will fuel higher inflation; dismissing recent price softness in areas outside shelter costs.
All of this suggests the Fed is erring on the side of more tightening, despite tepid inflation — something Wall Street isn’t going to like.
On a technical basis, the Dow Jones Industrial Average has settled back down on its 50-day moving average — yet another test of critical support that held prices throughout August. A breakdown could set up a test of the 200-day moving average that hasn’t been tested since the summer of 2016.
The situation is worse for the Russell 2000 small-cap index, which has been in a persistent sideways trading range since last December. A mid-August selloff, driven by North Korea fears, pushed the index under its 200-day average. Watch for a retest in the coming days.
Check out Serge Berger’s Trade of the Day for Sept. 6.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
