Market Concerns Rise as Semiconductors Suffer Worst Day in More than Four Years
Equities finished down on the week by 1.3% as growth and small caps lagged versus defensive sectors. The S&P 500 rallied 10% from its opening low following the crash in Japanese markets a month ago, but investor angst is rising steadily as heavy attention is given to the macro data. The S&P 500 is only 3% below its all-time high, but previous momentum names are under pressure.
The most pressure is being felt in semiconductors, which had their largest single day drop since March 2020.
- Semiconductors were down more than 7% on Tuesday as weakness post NVIDIA’s earnings led to broad based selling.
- Semiconductors have now underperformed the S&P 500 by 17% over the last 40 days.
- This 40-day relative underperformance is the largest since 2008.
When the market was focused on inflation, usually higher rates and technology weakness was met with strength from energy and cyclicals. This has not been the case recently as oil prices have dipped under $70 per barrel. United States economic weakness persists, and China has failed to show any growth acceleration. Recession angst appears high despite the overall index near an all-time high.
All Eyes on the Macro Data
Manufacturing data remains weak with the ISM Manufacturing Index coming in at 47.2. New orders took a dive to 44.6. The record persistence in weak manufacturing remains as only two months in the last two years have seen a new orders reading above 50. If we do have a recession, this may be where attention focuses as the obvious signal that was ignored for so long.
Job openings disappointed as well with a big monthly drop. They are now down 37% from their 2022 peak. The series only goes back to 2000 but drops of more than 10% only occurred during recessions.
Bond yields have moved lower as the market begins to price in heavy cuts from the Fed in the coming months. The 10-year Treasury made its lowest close in over a year at 3.75%. The 2-year Treasury is at a two-year low yield of 3.75%. And the often watched 2- to 10-year Treasury yield curve sits right near zero and its highest reading in over two years.
The market is currently pricing in more than four cuts by the end of the year. With three meetings, that means at least one needs to be a 50-basis point cut for this to pan out. Over the next one year the market is pricing in nine cuts to the Federal Funds rate.
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Sources: BTC Capital Management, Bloomberg
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