Major Indexes Close In The Red, Dow Falls Below 40,000 As Investors Make U-Turn On Economic Outlook

Major U.S. equity indexes ended Thursday’s session on a weaker note as investors reconsidered the economic outlook in light of the latest batch of contrasting data.

Both the S&P 500 and the Nasdaq 100 fell by 0.2%, closing at 5,297 points and 18,557 points, respectively.

The Dow Jones Industrial Average, which surpassed the 40,000 mark during morning trading, closed 0.1% lower at 39,869.

Thursday’s economic data revealed a decline in initial jobless claims and higher-than-expected import and export prices, with the latter reigniting some anxiety about inflation. Housing starts and building permits were disappointing, and industrial production stalled.

Federal Reserve Bank of Cleveland President Loretta Mester stated on Thursday that it will take longer to be confident that inflation is moving toward 2% and emphasized the need for continued restrictive policies. She welcomed the latest inflation data as a sign of cooling price pressures but warned that the U.S. fiscal path is unsustainable and must be brought under control.

Treasury yields closed higher across the board, with the rate-sensitive two-year yield surging by 7 basis points to 4.80%, snapping a three-day streak of declines.

Is Bad News Still Good News?

Veteran investor Ed Yardeni explained that both good and bad news are working as a positive catalyst for the stock market. Yardeni noted that stocks positively reacted to the weaker-than-expected economic indicators, which led to a decline in the 10-year U.S. Treasury bond yield from its recent peak.

For example, the market welcomed the ISM manufacturing index dropping below 50 and flat retail sales data in April, despite these indicators suggesting slowing economic momentum.

Offering a contrarian view, Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, argued, “The ‘bad news is good news' narrative should not be this bullish.” He cautioned that the market’s risk stance is complacent, evidenced by the low level of the VIX.

Holzer also warned that the high and positive correlation between bonds and stocks poses a significant risk to overall portfolio performance.

Thursday’s Movers In Sectors And Stocks

Sector-wise, consumer staples was the only sector recording gains on Thursday, with the Consumer Staples Select Sector SPDR Fund XLP up 1.4%.

Walmart Inc. WMT rallied 6.5% amid stronger-than-expected earnings, contributing to nearly half of the daily performance of the overall consumer staples sector.

Materials, as tracked by the Materials Select Sector SPDR Fund XLB, were the laggards, down 0.7%. Martin Marietta Materials, Inc. MLM, Vulcan Materials Company VMC and Freeport-McMoRan Inc. FCX were the sector’s weakest performers, down 5%, 3.9% and 2.8%, respectively.

Industry-wise, homebuilders fell heavily amid worse-than-expected housing starts and building permits data, with the iShares U.S. Home Construction ETF ITB falling 3.1%, on its worst day in more than a month.

D.R. Horton Inc. DHI and Lennar Corporation LEN were notable fallers among the sector’s heavyweights, with declines of 4.2% and 3.3%, respectively.

Telecom stocks, as tracked by the SPDR S&P Telecom ETF XTL, closed in the green, up 1.6%, marking their sixth straight session of gains. Notable gainers were AST SpaceMobile, Inc. ASTS, up 68.4%, and Extreme Networks, Inc. EXTR.

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