The S&P 500 lost 0.5% on Thursday in a defensive session, which saw the benchmark index up 0.7% shortly after the open. The Nasdaq Composite (-1.6%) and Russell 2000 (-1.3%) declined more than 1.0% while the Dow Jones Industrial Average declined just 0.3%.
The positive start was attributed to a $10 retracement in WTI crude futures (to $106/bbl from $116/bbl) amid speculation that a nuclear deal with Iran could be signed within the next few days. WTI crude futures settled lower by 2.9%, or $3.23, to $107.81/bbl.
Stocks turned negative shortly thereafter on no specific catalyst, but the decline did coincide with a relatively disappointing ISM Non-Manufacturing Index for February and tough-minded rhetoric from President Putin to French President Macron regarding Russia’s invasion of Ukraine.
On a related note, the second round of ceasefire talks between Russia and Ukraine ended with an understanding that there should be humanitarian corridors to safely evacuate civilians. That wasn’t exactly the outcome the market or Ukraine were hoping for, but both sides reportedly scheduled a third round of talks.
Investors assumed a defensive mindset, evident by the leadership positions of the S&P 500 utilities (+1.7%), real estate (+1.1%), consumer staples (+0.7%), and health care (+0.5%) sectors. Kroger ( KR 55.10, +5.73, +11.6%) provided an added boost for the consumer staples sector following its earnings report.
Conversely, the consumer discretionary (-2.3%), information technology (-1.2%), and communication services (-0.8%) sectors underperformed amid weakness in the mega-caps. The Vanguard Mega Cap Growth ETF ( MGK 222.19, -3.33) fell 1.5%, versus a 0.2% decline in the Invesco S&P 500 Equal Weight ETF ( RSP 154.51, -0.32).
The mega-caps were excluded from the defensive shift, declining alongside high-beta growth stocks, which were pressured by weakness in Snowflake ( SNOW 224.02, -40.67, -15.4%), Veeva Systems ( VEEV 193.16, -37.46, -16.2%), and Okta ( OKTA 167.98, -14.72, -8.1%) following their earnings reports.
Away from equities, the Treasury market was relatively well behaved in front of the February employment report tomorrow. The 10-yr yield decreased two basis points to 1.84%, further corroborating the defensive bias, while the 2-yr yield increased two basis points to 1.54%. The U.S. Dollar Index rose 0.4% to 97.74.
Reviewing Thursday’s economic data:
- The ISM Non-Manufacturing Index for February decreased to 56.5% (Briefing.com consensus 61.0%) from 59.9% in January. The dividing line between expansion and contraction is 50.0%. The February reading marks the 21st straight month of growth for the services sector, albeit at a slower pace than what was seen in January.
- The key takeaway from the report is that business activity was held back in February by inflation pressures, supply constraints, logistical challenges, and labor shortages.
- Initial jobless claims for the week ending February 26 decreased by 18,000 to 215,000 (Briefing.com consensus 226,000) and continuing claims for the week ending February 19 increased by 2,000 to 1.476 million.
- The key takeaway from the report is that initial claims are at a level that is consistent with a tight labor market.
- The revised Q4 nonfarm business sector labor productivity showed no change to the advance estimate of 6.6% (Briefing.com consensus 6.7%), as output increased 9.1% and hours worked increased 2.4%. Unit labor costs, though, were revised up to 0.9% (Briefing.com consensus 0.3%) from 0.3% as hourly compensation increased 7.5% versus the 6.6% increase in productivity.
- The key takeaway is that the healthy increase in productivity in Q4 helped keep unit labor costs in check, but it isn’t necessarily resonating as a celebratory factor given the steady acknowledgment of rising labor costs heard from companies reporting Q4 earnings.
- Factory orders for manufactured goods increased 1.4% m/m in January (Briefing.com consensus 0.5%) following an upwardly revised 0.7% increase (from -0.4%) in December. Shipments of manufactured goods jumped 1.2% after increasing 0.7% in December.
- The key takeaway from the report is the uptick seen in order growth for nondefense capital goods, excluding aircraft – a proxy for business spending.
- The final IHS Markit Services PMI for February decreased to 56.5 from 56.7 in the preliminary reading.
Looking ahead, investors will receive the Employment Situation report for February on Friday.
- Dow Jones Industrial Average -7.0% YTD
- S&P 500 -8.5% YTD
- Russell 2000 -9.5% YTD
- Nasdaq Composite -13.5% YTD
Overseas:
- Europe: DAX -2.2%, FTSE -2.6%, CAC -1.8%
- Asia: Nikkei +0.7%, Hang Seng +0.6%, Shanghai -0.1%
Commodities:
- Crude Oil -3.23 @ 107.81
- Nat Gas -0.03 @ 4.76
- Gold +12.60 @ 1935.60
- Silver +0.00 @ 25.25
- Copper +0.08 @ 4.76