Stocks Suffer ‘Heat Check’ as Rally Hits a Wall: Markets Wrap

(Bloomberg) — Wall Street traders sent stocks sliding on speculation that a rally to multiple records this year is now overdone.

Just when investors were wrapping their heads around a mixed jobs report, weakness in the S&P 500’s most-influential group weighed heavily on trading. Technology came under pressure, with the Nasdaq 100 down 1.5% and Nvidia Corp. halting a six-day winning streak. Tesla Inc. extended this week’s slump to 13% and Broadcom Inc. tumbled on slow chip sales.

Warnings about an overbought market have surfaced after an almost 35% surge in the S&P 500 since the start of last year. Bank of America Corp.’s Michael Hartnett — who has taken a more neutral tone on stocks after remaining bearish in 2023 — said equities are showing “abnormal gains” in “abnormal times.” That’s left positioning “stretched and extended” ahead of expectations for an eventual rate cut.

Never miss an episode. Follow the Big Take podcast on iHeart, Apple Podcasts, Spotify or wherever you listen. Read the transcript.

“There is absolutely zero question in our minds that a decent amount of ‘froth’ has moved into the marketplace over the near-term,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Investors should use the next week or so to raise some cash and get a bit more defensive.”

Earlier in the day, data showed the US economy continued to add jobs — without spurring a surge in wages. The figures revived hopes the Federal Reserve will be able to achieve a soft landing, allowing officials to start easing policy this year, but without running the risk of doing that too soon.

“The report didn’t necessarily amount to an ‘all-clear’ signal for the Fed, but there also didn’t appear to be anything in it that would derail its plan to cut rates,” said Chris Larkin at E*Trade from Morgan Stanley.

Treasury two-year yields fell two basis points to 4.48%, with traders almost fully pricing in a quarter-point Fed cut in June. The dollar saw its longest losing streak since October. Bitcoin briefly touched $70,000.

The US jobless rate climbed to a two-year high in February even as hiring remained healthy, pointing to a cooler yet resilient labor market. Nonfarm payrolls advanced 275,000 last month following a combined 167,000 downward revision to the prior two months. The unemployment rate rose to 3.9% and wage gains slowed.

Seema Shah at Principal Asset Management — and several other market observers — said the report was “all over the place.” Nonetheless, Shah sees the broad figures as somewhat market positive.

“If the economy can continue to add jobs, without triggering a resurgence in wage growth, the Fed will achieve its soft landing,” she noted.

In other words, this report confirms that the labor market is strong — but not overheating — which means the Fed is still on track for rate cuts this year, says Sonu Varghese at Carson Group.

“Labor is rolling, and wage inflation is rolling over — the Fed is threading the needle on its dual mandate,” said Jamie Cox at Harris Financial Group. “No one expected this result, but it’s happening.”

Swap contracts that predict the Fed’s decisions repriced to lower rate levels, implying traders expect almost 100 basis points of Fed easing by year-end. Last month, these contracts briefly priced in less than 75 basis points of easing this year, down from more than 150 basis points seen early in 2024.

To Gina Bolvin at Bolvin Wealth Management Group, the fact that unemployment ticked up was the biggest takeaway of Friday’s numbers. She’s among those betting the odds of a rate cut in June are increasing as the Fed would become worried if unemployment reached 4%.

“If we are genuinely seeing the unemployment rate having troughed and moving higher and wage growth slowing, then it obviously pushes the door for rate cuts open wider,” said Charles Hepworth at GAM Investments.

Fed Bank of Chicago President Austan Goolsbee said Friday he expects policymakers will lower interest rates this year as inflation cools further.

Fed Chair Jerome Powell, testifying this week before lawmakers, said he believed the labor market was “coming into better balance between supply and demand.” He also suggested the central bank is getting close to the confidence it needs to start lowering interest rates.

Ian Lyngen at BMO Capital Markets says soft wage figures were notable.

“If nothing else, this update on wage inflation reflects Powell’s messaging that the first cut is nearing,” he noted.

About $4.4 billion was pulled from tech funds in the week through March 6, BofA strategists led by Hartnett wrote in a note, citing EPFR Global data.

Cathie Wood says semiconductor stocks may endure a market correction as the supply chain for the technology perks up.

“The one place we could see a correction — and it’s just a correction, we’re not calling it the end of this at all — is in the chip space,” the head of ARK Investment Management said.

Nvidia, the poster child of the artificial-intelligence frenzy that has powered the bull market, lost traction on Friday. But its scorching rally this year has sent it well above the level where it last split its shares. Some see the AI giant well placed to do so again.

The company last announced a four-for-one stock split in May 2021, when it was trading at about $600 per share. The stock topped $900 earlier this week. The reasoning Nvidia gave for its 2021 split was “to make stock ownership more accessible to investors and employees,” according to a statement.

To be sure, Nvidia hasn’t made any indication that it would split its shares anytime soon.

Corporate Highlights:

• A United Airlines Holdings Inc. aircraft ran off the taxiway into a grassy area after landing at Houston on Friday, marking the third headline-grabbing incident this week involving the carrier’s Boeing Co. planes.
• Apple Inc., facing mounting pressure from regulators in the European Union, has reversed a decision to ban Fortnite maker Epic Games Inc. from offering its own iPhone app marketplace in the region.
• Taiwan Semiconductor Manufacturing Co. is set to win more than $5 billion in federal grants to support a chipmaking project in Arizona, according to people familiar with the matter, in what would mark a major milestone in President Joe Biden’s effort to revitalize American semiconductor manufacturing.
• Novo Nordisk A/S’s blockbuster drug Wegovy gained expanded US approval to include reducing the risk for heart attacks and strokes, a move that could further widen use and insurer coverage of the popular anti-obesity medication.
• Eli Lilly & Co.’s Alzheimer’s disease drug donanemab faces further delays in gaining US approval, with regulators planning to hold a hearing of external advisers to explore how safe the therapy is and how well it works.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.7% as of 4 p.m. New York time
• The Nasdaq 100 fell 1.5%
• The Dow Jones Industrial Average fell 0.2%
• The MSCI World index fell 0.3%

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%
• The euro fell 0.1% to $1.0937
• The British pound rose 0.3% to $1.2852
• The Japanese yen rose 0.7% to 147.07 per dollar

Cryptocurrencies

• Bitcoin rose 2.8% to $69,219.41
• Ether rose 1.9% to $3,948.19

Bonds

• The yield on 10-year Treasuries was little changed at 4.08%
• Germany’s 10-year yield declined four basis points to 2.27%
• Britain’s 10-year yield declined two basis points to 3.98%

Commodities

• West Texas Intermediate crude fell 1.3% to $77.93 a barrel
• Spot gold rose 0.8% to $2,177.71 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Felice Maranz, Liz Capo McCormick, Elizabeth Stanton, Carmen Reinicke, David Marino and Sagarika Jaisinghani.

©2024 Bloomberg L.P.