U.S. stocks fell for a second consecutive day on Wednesday, as investors processed rising Treasury yields and positioned themselves ahead of key economic data releases. The major indexes retreated amid a lack of immediate catalysts, with weakness in technology stocks offsetting gains in the energy sector.
Key Takeaways
- The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all closed lower for the second straight session.
- Treasury yields continued their ascent, with the 10-year note yield rising to 4.14% and the 2-year yield reaching 3.6%.
- The energy sector was a notable outperformer, driven by a 2.5% increase in West Texas Intermediate (WTI) crude oil prices.
- Analysts view the current market movement as a technical pullback after a sustained rally, but caution against complacency.
- Investors are closely watching for upcoming economic reports, including GDP figures and the Personal Consumption Expenditures (PCE) price index.
Market Performance and Sector Analysis
On Wednesday, the three major U.S. stock indexes recorded their second day of losses. The Dow Jones Industrial Average declined by 172 points, a 0.4% drop. The broader S&P 500 index fell by 0.3%, while the technology-focused Nasdaq Composite decreased by 0.4%.
This marked the first time since September 2 that all three benchmarks fell in unison for two consecutive days. The market's breadth was negative, with only 216 of the S&P 500's components finishing the day with gains.
Sector Divergence: Energy Leads, Tech Lags
While the overall market trended downward, performance varied significantly across different sectors. The S&P 500's energy sector was the clear leader, climbing 1.9% as oil prices surged. This gain highlighted the influence of commodity markets on equity performance.
In contrast, technology and communication services sectors continued their recent pullback. The iShares Semiconductor ETF, a key barometer for the chip industry, dropped by 0.9%. Other lagging sectors included materials and real estate, reflecting concerns about rising interest rates and economic sensitivity.
This divergence was also visible in investment styles. Exchange-traded funds (ETFs) focused on value and dividend stocks performed better than those centered on growth and momentum strategies.
Bond Market Moves Influence Stocks
A significant factor influencing the stock market was the activity in government bonds. The yield on the 10-year Treasury note, a benchmark for borrowing costs across the economy, rose to 4.15%. Similarly, the yield on the 2-year Treasury note, which is more sensitive to near-term interest rate expectations, increased to 3.61%. Rising yields can make safer government bonds more attractive relative to riskier assets like stocks.
Technical Pullback or a Shift in Momentum?
Analysts are closely examining whether the recent downturn is a temporary pause or the beginning of a more significant correction. Some technical indicators suggest the market was due for a cooling-off period after a strong multi-month rally.
Frank Cappelleri, founder of the technical analysis firm CappThesis, described the current market action as a "normal pullback." He noted that the market had become short-term extended.
"We can see this in various ways—one traditional indicator that many people point to is the 14-day RSI [Relative Strength Index]," Cappelleri explained to Barron's.
According to Cappelleri, the S&P 500's 14-day RSI recently entered "overbought" territory for the fourth time since the market lows in April. In the three previous instances, the market experienced minor pullbacks before resuming its upward trend.
A Warning Against Complacency
While past performance suggests the dip could be temporary, Cappelleri cautioned investors. "While there’s no sign this time is different, we also have to be careful not to get too complacent, since at some point a bigger decline will be in the cards," he stated. The real test, he argued, will be how the market responds to the next buying opportunity. If buyers are not quickly rewarded with new highs, it could signal a shift in momentum.
Debating the 'Bubble' Narrative
The strong performance, particularly in the tech sector, has led to some discussions about a potential market bubble. However, not all analysts agree with this assessment.
Daniel Skelly, who heads Market Research & Strategy for Morgan Stanley's Wealth Management, believes such talk is misplaced. "While even the strongest rallies inevitably experience retracements, and the market certainly faces ongoing policy and economic uncertainties, there are good reasons to believe this talk is misplaced," he wrote.
Skelly provided historical context, noting that over the past 50 years, there have been five bull markets that lasted more than two years. The average duration of those bull markets was eight years. The current bull market, which began in October 2022, is less than three years old, suggesting it may have more room to run.
Commodities and Geopolitical Factors
The energy market was a focal point for investors on Wednesday. Crude oil futures posted their second consecutive day of gains, providing a significant boost to energy stocks. West Texas Intermediate (WTI) crude settled up 2.5% at $64.99 per barrel, while Brent crude, the international benchmark, closed at $69.31 per barrel.
Supply Concerns Drive Oil Prices Higher
Several factors contributed to the rise in oil prices. Geopolitical tensions played a key role, with ongoing Ukrainian attacks on Russian oil infrastructure raising concerns about global supply disruptions. Robert Yawger of Mizuho noted in a report that "The Russian bid continues to support crude oil prices."
Fundamental data from the U.S. also supported prices. The Energy Information Administration (EIA) reported a decline of 607,000 barrels in U.S. crude inventories. This followed a large drawdown in the previous week and came despite an increase in imports and a decrease in exports. The report also showed that U.S. gasoline and diesel stockpiles fell, indicating steady demand.
Looking Ahead: Key Economic Data on the Horizon
With little market-moving news on Wednesday, investors are looking ahead to a series of important economic data releases scheduled for the remainder of the week. These reports will provide further insight into the health of the U.S. economy and could influence the Federal Reserve's future policy decisions.
Upcoming data points include:
- Gross Domestic Product (GDP): An updated reading on second-quarter economic growth.
- Durable Goods Orders: Data for August will offer a look at business investment and manufacturing activity.
- Existing-Home Sales: This report will provide information on the state of the housing market.
However, the most anticipated report is the Personal Consumption Expenditures (PCE) price index for August, which is due on Friday. The PCE index is the Federal Reserve's preferred measure of inflation, and the data will be scrutinized for clues about the direction of consumer prices and future interest rate policy.
