(Bloomberg) — A three-week drawdown in US stocks resumed in force, again sending the S&P 500 to the precipice of a 10% correction. Fresh salvos in President Donald Trump’s trade war doused optimism spurred by another benign inflation report and stoked demand for havens in Treasuries.
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Despite some attempts to snap up discounted shares, the S&P 500 hasn’t notched two straight days of gains since its February peak. Since then, the gauge has shed about $5 trillion in value. As investors questioned lofty valuations in the market’s most-influential group, big tech came under renewed pressure, dragging the US equity benchmark down about 1% Thursday.
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In another sign of a trade-war escalation, Trump threatened to enact a 200% tariff on European wine, champagne and other alcoholic beverages. US wholesale inflation stagnated in February thanks to a sharp decline in trade margins, though one measure of goods prices jumped and details were also less favorable for the Fed’s preferred inflation gauge.
With less than one week to go for the next Federal Reserve decision, investors bet officials will stay put until June or July as they evaluate the effects of tariffs on America’s top trading partners.
“Thursday’s inflation data is backward looking, and the real worry is the inflationary effects that may come from tariffs, which is a wild card for markets and the Federal Reserve,” said Paul Stanley at Granite Bay Wealth Management.
The S&P 500 fell 1%. The Nasdaq 100 slid 1.4%. The Dow Jones Industrial Average dropped 1%. A gauge of tech megacaps lost 2.2%. Adobe Inc. sank on a disappointing outlook, while Intel Corp. surged after naming an industry veteran as its next chief.
The yield on 10-year Treasuries was little changed at 4.31%. A dollar gauge wavered.
Trump used markets as a litmus test for the success of his first administration, and relished in the gains posted after his victory in November.
But the stark shift from economic optimism is creating an unsettling reality for traders trying to figure out where America’s markets go from here. One major question: At a time when it’s easier than ever for people to see fluctuations in their day-to-day net worth, can a stock rout take the US economy down with it?
“Market fears remain at the forefront,” said Bespoke Investment Group strategists. “Investor sentiment also remains very weak.”
Bespoke cited the latest weekly poll from the American Association of Individual Investors, which showed that bearish sentiment was above 55% for the third straight week.
“The only other time since 1987 that bearish sentiment was above the ‘speed limit’ was in the three weeks ending March 4, 2009,” the Bespoke strategists noted.
The flip side of souring sentiment is that it could be a contrarian indicator for markets, noted Jeff Schulze at ClearBridge Investments.
“Surging policy uncertainty has dented consumer and investor sentiment, raised inflation expectations and stalled the equity market rally, he said. “Should policy uncertainty ebb in the coming months, we believe risk assets will rebound.”
US equities are pricing in a recession risk much bigger than credit markets, leaving room for a positive surprise, according to JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou and Mika Inkinen wrote in a note.
“While there is clearly elevated uncertainty in the near term as the Trump Administration has at least initially prioritized more disruptive polices, the risk is that credit markets are proven right,” they said.
“The sharp drop in equity markets has been painful, especially given the selling pressure started off at a fresh record high on February 19,” said Adam Turnquist at LPL Financial. “However, the downside rate of change and current drawdown is nothing out of the ordinary.”
Since 1950, 92% of trading days are accompanied by some degree of a drawdown on the S&P 500 (roughly 8% of days have been record highs), he said. A selloff inside of 5% is the most common, occurring in around 40% of all trading days.
“Swift drawdowns also create oversold conditions, and we are beginning to see signs of the broader market reaching washed-out territory,” he said. “However, the damage to longer-term breadth, lack of institutional participation, and defensive rotational pressures leave us cautious on buying the dip right now.”
Key events this week:
Some of the main moves in markets:
Stocks
The S&P 500 fell 1% as of 12:10 p.m. New York time
The Nasdaq 100 fell 1.4%
The Dow Jones Industrial Average fell 1%
The Stoxx Europe 600 was little changed
The MSCI World Index fell 0.9%
Bloomberg Magnificent 7 Total Return Index fell 2.2%
The Russell 2000 Index fell 1.3%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.3% to $1.0857
The British pound fell 0.2% to $1.2939
The Japanese yen rose 0.3% to 147.79 per dollar
Cryptocurrencies
Bitcoin fell 2.6% to $80,921.48
Ether fell 1% to $1,871.93
Bonds
The yield on 10-year Treasuries was little changed at 4.31%
Germany’s 10-year yield declined two basis points to 2.86%
Britain’s 10-year yield declined three basis points to 4.69%
Commodities
West Texas Intermediate crude fell 1% to $67.03 a barrel
Spot gold rose 1.5% to $2,979.88 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Sujata Rao, Allegra Catelli, Chiranjivi Chakraborty and John Viljoen.
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