The S&P 500 and the Nasdaq fell on Wednesday as the ongoing shift away from megacap tech-related equities was made worse by falling microchip shares amid possible escalation of U.S. trade disputes with China.
The Philadelphia SE Semiconductor index saw its largest one-day decline since March 2020 when microchip stocks fell 6.8% following a report that the Biden administration is considering imposing strict trade restrictions against China.
While the benchmark S&P 500 fell 1.4%, the Nasdaq fell 2.8% due to a retreat in the "Magnificent 7" group of momentum stocks, which was led by Apple and Nvidia.
The Dow Jones Industrial Average managed to hold onto a slight gain and record its third consecutive closing high. Until recently, the Dow Jones Industrial Average underperformed the other two indexes this year.
Intel Corp. defied the declining chip sector and gained ground on the blue-chip average thanks to Johnson & Johnson and UnitedHealth Group.
A huge pressure
Michael Green, chief strategist at Simplify Asset Management in Philadelphia, explained that the sell-off is driven by pressure in the chip sector, now extending into small caps for the first time.
Green also noted that increasing U.S. discussions about cracking down on China have exacerbated the ongoing market unwind. He added that many previously neglected areas of the equities market are now experiencing selective buying.
Driven by renewed interest in more cheap stocks and sectors within the equities market, the smallcap Russell 2000, which had jumped 11.5% over the previous five sessions, ended its longest winning streak in excess of four years.
The CBOE Market Volatility index momentarily reached its highest level in six weeks, indicating growing investor anxiety.
This year, megacap momentum stocks and chips have done better than the market as a whole.
In terms of the economy, a decline in single-family homebuilding is offset by strength in multi-unit projects, as evidenced by housing starts and building permits that unexpectedly rose. Separate data showed that June's industrial output increased at a rate twice as fast as anticipated.
Moreover, the statistics coincided with recent reports indicating that the resilience of the US economy will assist the Federal Reserve in bringing inflation down to its target of 2% without causing the economy to contract, even in the face of softening signs.
The Federal Reserve published its Beige Book on Wednesday, indicating that while the jobs market continued to weaken, U.S. economic activity grew at a moderate rate from late May to early July.
Chuck Carlson, CEO of Horizon Investment Services in Hammond, Indiana, noted that the narrative has shifted somewhat. He observed that the economy appears to be on a course for a soft landing, prompting a move to buy economically sensitive stocks.
As per CME's FedWatch tool, there is a 93.5% chance that the Fed will start reducing rates in September, which has been priced in by the financial markets.
While acknowledging that the central bank is getting close to lowering rates, some monetary policy makers would rather see more evidence demonstrating that inflation is on a sustainable downward trajectory.
With Johnson & Johnson reporting better-than-expected profit and revenue driven by strong drug sales, the second-quarter earnings season is getting underway.
The S&P 500 dropped 78.93 points, or 1.39%, to 5,588.27, the Nasdaq Composite fell 512.42 points, or 2.77%, to 17,996.93, and the Dow Jones Industrial Average increased 243.6 points, or 0.59%, to 41,198.08.
Consumer staples led the gainers among the S&P 500's 11 major sectors, with technology and communication services experiencing the largest percentage declines.
Furthermore, the NYSE had a 1.39-to-1 ratio favoring declining issues over advancing ones, while on Nasdaq, the ratio was 1.66-to-1 in favor of decliners. While the Nasdaq Composite recorded 251 new highs and 37 new lows, the S&P 500 recorded 82 new 52-week highs and no new lows.
The volume of shares traded on U.S. exchanges was 12.47 billion, which was lower than the average of 11.74-billion for the entire session over the previous 20 trading days.