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U.S. stocks end mostly lower Tuesday, Nasdaq rises to new peak after fall in ISM service sector gauge

MarketWatch logo MarketWatch 7/6/2021 Christine Idzelis
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MARKET SNAPSHOT

U.S. stocks ended most lower Tuesday, with the Dow Jones Industrial Average and S&P 500 index pulling back from record levels as the Nasdaq rose to a new peak, with financial and energy stocks weakening most as bond yields and oil prices fell.


Video: Nasdaq closes up on tech stocks strength, as hawkish Fed limits S&P (Reuters)

Investors kept tabs on oil prices, which pulled back after surging to six-year highs when talks by the Organization of the Petroleum Exporting Countries and its allies failed to come to an agreement on a proposal to boost output in coming months.

What are major benchmarks doing?
  • The Dow Jones Industrial Average dropped 208.98 points, or 0.6%, to 34,577.37.
  • The S&P 500 declined 8.8 points, or 0.2%, to 4,343.54, ending a 7-day winning streak.
  • The Nasdaq Composite edged up 24.32 points in late afternoon trading to close 0.2% higher at a record 14,663.64.

U.S. markets were closed Monday in observance of Independence Day, which fell on Sunday. On Friday, the S&P 500 closed at its seventh consecutive record — its longest such streak since 1997 — and the Nasdaq Composite and Dow also finished at all-time highs.

What drove the market?

Stocks mostly retreated Tuesday, after investors pushed the market to fresh peaks in recent weeks on a strengthening economy, though supply-chain bottlenecks are seen slowing the recovery.

The Institute for Supply Management on Tuesday said its service sector purchasing managers index fell to 60.1% in June from a record 64% in May. A reading of more than 50% indicates an expansion in activity. The IHS Markit final June services PMI fell to 64.6, down from 70.4 in May.

“The drop in the ISM services index in June suggests that shortages and price increases are becoming an increasing drag on hiring and economic activity,” said Michael Pearce, senior U.S. economist at Capital Economics, in a note.

The results are still “solid,” but the ISM services index’s larger-than-expected decline has raised investor concerns over the robustness of the economic recovery, according to Michael Arone, chief investment strategist at State Street Global Advisors’s U.S. SPDR business. “It begs the question, are we past the peak from the pandemic in terms of the economy rebounding?” he said in an interview Tuesday.

Read: What to expect if ‘peak everything’ already has happened and markets feel the force of gravity again

Arone expects investors will be focused on what “corporate executives have to say about the future” as they begin discussing their earnings results for the second quarter in coming weeks. Meanwhile, a pause in the stock market would be “healthy,” he said, adding that he expects equities can continue to grind higher this year.

Equities should continue to benefit over the short-term from low interest rates and pent-up consumer demand after the pandemic kept people home for so long, said Brian Walsh Jr., a financial advisor at Wayne, Pennsylvania-based wealth manager Walsh & Nicholson Financial Group, in a phone interview Tuesday. Inflation is a top concern for Walsh, who said he noticed substantially higher prices at restaurants while visiting a “packed” Jersey Shore over the July 4 holiday weekend. 

“It was beyond pre-pandemic,” Walsh said of the crowds he observed. “It was flooded with people.”

Walsh & Nicholson Financial Group, which oversees about $1 billion of assets, likes high-quality stocks with strong cash flows that will be able handle rising inflation, according to Walsh. “We have a strong tilt toward high-quality, dividend-paying companies,” he said. Walsh added that he  is avoiding adding new money to growth stocks due to concern about high valuations and is favoring an equal-weighted approach to investing in stocks in the S&P 500 index to avoid a top-heavy exposure to technology. 

Walsh pointed to the Invesco S&P 500 Equal Weight ETF as an example of this strategy. The exchange-traded fund is up about 18.3% this year through Tuesday, according to FactSet. That compares with a year-to-date gain of about 15.6% for the S&P 500 index, whose largest sector exposure is information technology, FactSet data show.

Meanwhile, U.S. Treasury prices rallied, pushing down yields, with the rate on the benchmark 10-year Treasury note falling back below 1.40%. Falling yields can be a boon to technology and other growth stocks more sensitive to interest rates, while undercutting shares of banks that tend to benefit from higher long-term rates. Goldman Sachs and JP Morgan both fell.

The tech-heavy Nasdaq eked out a record high Tuesday, even as the S&P 500 and Dow fell. Analysts said the overall backdrop remains positive as the second half of the year gets under way.

“Sentiment towards risk remains positive as we enter the second half of the year after a positive end to Q2. The S&P 500 and other U.S. indices hit repeated new all-time highs, with investors happy to buy every dip in the markets,” said Fawad Razaqzada, analyst at ThinkMarkets, in a note.

Need to Know: Here’s what could turn a ‘breather’ for stocks into a bigger correction

Accelerating COVID-19 vaccinations around the world and central bank stimulus are seen contributing to strong economic growth, while fears that inflation will hit uncomfortably high levels have been kept at bay as the Federal Reserve and other central banks insist that increased price pressures are a temporary phenomenon resulting from supply-chain bottlenecks, he said.

For its part, Morgan Creek Capital Management has been taking profits from growth stocks while “modestly” increasing its short exposure in equities amid concern the market has become concentrated in tech, according to Mark Yusko, the firm’s founder, chief executive officer and chief investment officer. Yusko told MarketWatch Tuesday that the rise in share prices of some tech stocks, such as Nvidia Corp.

has gone too far in his view, even if they’re good companies.

 Also see: Is the market pricing in ‘peak growth’? These charts suggest as much, says a leading strategist

Meanwhile, oil prices were back in focus, with crude benchmarks pulling back after hitting levels last seen in 2014. Chevron

led energy stocks lower.

Talks were called off Monday after the United Arab Emirates stuck to its call to increase the baseline used to determine its output level and objected to a plan to extend the framework for the existing program of supply cuts from April 2022 through the end of next year.

Which companies were in focus? How did other markets trade?
  • The yield on the 10-year Treasury note dropped 6.5 basis points to settle at 1.369%, the largest one-day decline since June 4. Yields and debt prices move in opposite directions.
  • The ICE U.S. Dollar Index a measure of the currency against a basket of six major rivals, rose 0.3%.
  • The U.S. oil benchmark ended sharply lower, down 2.4% to close at $73.37 a barrel on the New York Mercantile Exchange. Gold futures rose 0.6% to settle at $1,794.20 an ounce.
  • European equities closed lower, with London’s FTSE 100 falling 0.9% and the Stoxx Europe 600 index declining 0.5%.
  • In Asia, the Shanghai Composite edged down 0.1%, while Hong Kong’s Hang Seng Index fell 0.3% and Japan’s Nikkei 225 rose 0.2%.
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