By Lewis Krauskopf~Reuters:
Wall Street fell sharply on Thursday with the S&P 500 and Dow industrials on track for their worst daily drops in six weeks as investors continued a recent move out of technology shares.
The technology sector, which has led the S&P 500’s 8-percent gain for the year, dropped 2.1 percent, and were the worst-performing major group. Declines in big tech stocks, including Apple and Microsoft, weighed the most on the benchmark S&P.
Financials and energy were the only sectors in positive territory as investors may have been rotating into groups that have lagged this year.”U.S. equities have remained extended, at or close to record territory for an extended period of time really without a tremendous amount of conviction in the market,” said Peter Kenny, senior market strategist at Global Markets Advisory Group, in New York.
“It’s really been treading water. Without a major stimulus to drive prices higher, equities have to reset and that’s what they’re doing today,” Kenny said.
“Large-cap tech and software are extended on a valuation basis,” Kenny said. “The opposite is the case in financials and in energy.”
Bank stocks gained after the U.S. Federal Reserve approved the banks’ plans to raise dividend payouts and share buybacks under its annual stress test program. Wells Fargo shares rose 2.6 percent while Citigroup gained 3.3 percent.
Energy rose 0.4 percent. Oil prices edged up after a decline in weekly U.S. crude production temporarily alleviated concerns about deepening oversupply.
If crude oil is a metaphorical canary in the coal mine in regards to economic vitality, investors certainly aren’t paying much attention. On May 24th WTI crude closed at $51.36/bbl. This past Friday it closed at $43.17/bbl after rallying from an intra-day low of $42.62/bbl. That monthly performance (-16%) for WTI should be a data point worthy of consideration for investors particularly considering that both OPEC and non-OPEC members are making concerted efforts to prop up crude prices. The 16% drop in WTI in the wake of the bi-annual OPEC meeting is significant in and of itself but what, if anything, does it tell is of the broader economic climate?
I have long written about the strategic significance of crude as a barometer of economic vitality but increasingly crude appears to be either losing its relevance to equities or investors are ignoring it at their own peril.
Consider that during the same 30 day period during which crude dropped by 16%, the S&P 500 has moved from a low of 2,398 to 2,434.75 for a modest gain of 1.5%. Any gain in equities, given the back drop provided by crude and the resultant drag of the energy sector on the broader market, is noteworthy. Can the broader US equity landscape continue to defy the meltdown in energy prices and plod higher? And if so, for how long?
Given that the down draft in crude prices is being fueled by increased efficiency by US shale producers, leaky OPEC production limits and a resultant global supply glut, there may be a case to be made that unlike in years past the consumption side of the equation is not the direct driver of price that it once was. I remember telling a colleague after crude’s historic rout in recent years that we wouldn’t see a “7” handle on crude again in our life times. As time has passed that call seems increasingly optimistic. Given the global market forces at work we may not even get close to a “7” handle again.
If crude remains under pressure, does that necessarily mean that an economic slowdown is on the horizon? Historically speaking there has been a correlation, but we may be entering a new energy paradigm. New paradigm or not – crude prices will remain under pressure given the themes that have continued to plaque major oil producers.