Market rout continues, Dow loses 545 points

The stock sell-off deepened Thursday.

The Dow (^DJI) tumbled 2.13%, or 545.91 points as of market close, paring some losses after shedding as many as 698.97 points mid-afternoon. The index had plummeted more than 800 points at the end of trading Wednesday in its largest single-day decline since February. The S&P 500 (^GSPC) slipped 2.06%, or 57.31 points, posting its sixth straight day of losses. The Nasdaq (^IXIC)  fell 1.25%, or 92.99 points. 

Treasury yields retreated after hitting multiyear highs. The benchmark 10-year yield slipped to 3.15%, while the yield for the 30-year Treasury note declined to 3.32%.

“The US expansion is getting older and the Fed is ever tighter,” Citi Private Bank’s Steve Wieting said. “This impacts every global asset class to some degree and suggests a gradual shift to a more defensive asset allocation over time. Nonetheless, the drop in global shares in the past 24 hours is following the course of many routine corrections that have been followed by recoveries.”

The sell-off

Experts struggled to come to a consensus explanation for the equities sell-off, which ramped up on Thursday. However, professional traders pointed to a flurry of somewhat esoteric market factors.

“A cornucopia of reasons” being tossed out to explain drawdown include, “CTA positioning; leverage drawdown (crowded FANG names hammered, Big Shorts outperform); China (expanding CFIUS; arrest of China spy in Belgium; Renminbi nearing 7, luxury smashdown); rates repositioning (smashes growth names) amid heavy Treasury supply; technical breaches sparking stop-losses, and of course the buyback blackout,” Dave Lutz of JonesTrading Annapolis wrote in a note. 

Gregory Rowe, center, works with fellow traders on the floor of the New York Stock Exchange, Thursday, Oct. 11, 2018. The market’s recent decline was set off by a sharp drop in bond prices and a corresponding increase in yields last week and early this week. (AP Photo/Richard Drew)

To break some of this down, some experts said that the sell-off was a correction for stocks that had been disproportionately overbought and overvalued throughout the year.

“A number of sectors (IT, Health care and Consumer Discretionary) had deviated from trend for some time (over-bought), it was only when fund inflows into these respective sectors had also deviated from trend (over-owned) that the market was primed for a correction,” Jefferies analyst Sean Darby wrote in a note. 

Big technology names in particular that had “propped indices up all year long reversed course” on Wednesday, Jamie Cox of Harris Financial Group told Yahoo Finance. He cited Amazon (AMZN) and Netflix (NFLX) – down 6.15% and 8.38% at market close Wednesday, respectively – as two stocks that “had really, really bad days. And that’s actually rather overdue and sort of what you would see in a normal correction.”

While analysts were not able to point to a specific global event catalyzing the sell-off, macroeconomic factors that had been brewing for at least the past few weeks may have played a role.

Goldman Sachs analyst Charles Himmelberg called yesterday’s correction a “‘U.S. growth-off’ event,” he wrote in a note. “This growth repricing helps square the circle with last week’s sharp repricing of monetary policy and oil supply.” 

Our conversations with clients suggest to us that the macro themes driving last week’s repricing were under-appreciated,” Himmelberg said. “The visibility of monetary concerns in 2-year Treasury yields, for example, was clouded by the concurrent concerns over oil supply (which tend to depress yields). Disentangling such signals is the task for which our macro factors were designed.” 

Many, however, remained optimistic that this would not cut into growth in the real economy.

“The speed of the shift in the U.S. yield curve coupled with high oil prices and short-term over-owned sector positioning has undermined share prices,” Jefferies analyst Sean Darby wrote in a note. He added that, “While there are some similarities to the February correction, U.S. real rates are still below their historical trend while the U.S. is one of the few countries seeing positive earnings revisions.”

Spillover effects are unlikely into the real economy “given that real rates are still low,” Darby said. “The bottom line is that the S&P 500 sell off shouldn’t materially affect the economy. Some favored sectors had simply become over-owned and overbought at a time when treasuries sold-off.”

STOCKS: Facebook removes hundreds of “inauthentic pages”

Facebook (FB) said it purged the site of hundreds of pages and accounts spreading spam and misinformation ahead of the midterm elections. The company removed 559 pages and 251 accounts “that have consistently broken our rules against spam and coordinated inauthentic behavior,” the company said in a statement Thursday. “Many were using fake accounts or multiple accounts with the same names and posted massive amounts of content across a network of Groups and Pages to drive traffic to their websites.” Others used techniques such as ad farms to “mislead people into thinking that they were forums for legitimate political debate.” Facebook’s stock ended the day up 1.3% to $153.35 per share.

Shares of Walgreens (WBA) slipped after the drugstore chain posted fourth-quarter sales that fell short of expectations. The company reported revenue of $33.44 billon against expectations of $33.77 billion, according to the average analyst expectations as polled by Bloomberg. Adjusted earnings came in at $1.48 per share, beating expectations by 3 cents. Walgreens’s stock pared some losses by the end of trading Thursday, down 1.95% to $70.90 per share.

Shares of Delta Air Lines (DAL) rose after the company announced third-quarter profits that beat Wall Street expectations, with higher revenues boosted by increased travel demand and higher fares. The carrier’s net income rose 13% year-over-year to $1.31 billion for the three months ending September 30, while revenue rose 8% to $11.95 billion. The closely watched carrier metric of revenue-per-seat climbed 4.3% for the quarter from the year prior. Shares of Delta rose 3.6% to $51.50 each as of 4:04 p.m. ET.

ECONOMY: Core CPI increases at lower-than-expected pace 

The reading for the core Consumer Price Index, a measure of U.S. inflation, rose 0.1% month-over-month in September, short of expectations of 0.2%, according to the average of economists polled by Bloomberg. The month-over-month reading for CPI, excluding food and energy, was unchanged at 0.1%, versus average expectations of 0.2%. Core CPI registered a 2.3% annual gain, the least since February, from August’s 2.7% advance.

In theory, a lack of inflation gives the Federal Reserve a little less flexibility to tighten monetary policy through more interest rate hikes. President Trump has pointed to the Fed’s tightening of monetary policy as “crazy,” and indicated he thinks it may be contributing to volatility in the market.

“Back-to-back 0.1% core readings will cheer battered stock and bond markets, but they don’t change the likely trajectory for interest rates,” Ian Shepherdson, of Pantheon Macroeconomics, argued. “The Fed is focused on the very tight and tightening labor market and the threat of much faster wage gains, which the current zero level of real short rates will do nothing to constrain.”

More Americans filed for unemployment last week than expected, with the number of new claims rising to 214,000 from 207,000 the week prior. The average prediction by economists polled by Bloomberg was 207,000 for the week ending October 6.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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