The Dow suffered a loss of more than 200 points on Tuesday to register its worst one-day drop since Aug 17, ending its four day winning streak. Such losses were incurred after investors rotated out of relatively riskier assets due to escalating tensions between Pyongyang and Washington. Likelihood of the fallout of another hurricane named Irma over the coast of Florida sent home insurers lower.
The Dow Jones Industrial Average (DJIA) closed at 21,987.56, declining 234.25 points or 1.1%. United Technologies UTX was the Dow’s biggest decliner after its shares tanked 5.7% following a deal with Rockwell Collins to purchase the latter for $30 billion. The S&P 500 Index (INX) dipped 0.8% to close at 2,457.85, ending a six day winning streak and recording its worst daily drop since Aug 17. Meanwhile, the Nasdaq Composite Index (IXIC) closed at 6,375.57, decreasing 0.9%. Trade volumes remained lower on Tuesday due to Labor Day holiday.
A total of 6.7 billion shares were traded on Tuesday, higher than the last 20-session average of 5.8 billion shares. Declining issues outnumbered advancers on the NYSE by a 2.34-to-1 ratio. On the Nasdaq, decliners outnumbered advancers by a 2.14-to-1 ratio. The CBOE Volatility index (VIX) increased 21% to 12.23.
Geopolitical Tensions Send Shivers Down the Markets
The CBOE Volatility index (VIX), widely regarded as the fear guage in the market, briefly jumped more than 38% to 14 on Tuesday. This was because of the escalating geopolitical tensions between North Korea and the United States. Over the weekend, North Korea tested its most powerful nuclear bomb, raising geopolitical instability in the Korean Peninsula and between Pyongyang and Washington.
The latest missile test resulted in North Korea earning flak from leaders in the U.S. The U.S. Secretary of Defense, Jim Mattis warned Pyongyang that it would have to face “a massive military response” in case of it attacked the U.S. or any of its allies such as South Korea and Japan. “We have many military options and the President wanted to be briefed on each one of them,” said Mattis on Sunday afternoon.
Moreover, South Korea’s defense ministry announced that North Korea was preparing to launch another intercontinental ballistic missile. Major General Jang Kyung-soo, the acting deputy minister for national defense policy, South Korea, said there are indications that North Korea will launch another ICBM, which they would test around Sep 9, their Foundation Day. Such statements hurt investor sentiments.
Investors Rotate Out of Financials into Bonds
The S&P 500 suffered its worst daily drop since Aug 17 following a nosedive in shares o financials. Eight of the S&P 500’s 11 main sectors closed lower, with financials leading the decliners. The Financial Select Sector SPDR Fund (XLF) lost 2.10%, suffering its worst decline since May. Such a decline was the result of investors moving out of stocks that would have benefitted from tax deregulations to safer havens such as bonds. Market watchers are increasingly losing faith on Trump Administration’s ability to push through the much awaited tax reforms. Moreover, the recent rhetoric between Pyongyang and Washington also led investors to rotate out of riskier assets.
The rotation from financial shares into bonds led to the yield on 10-year Treasury notes falling to 2.07%, its lowest level since Nov 9, 2016. Shares of financial companies nosedived on Tuesday. Also weighing on treasury bonds were comments fromFederal Reserve Governor Lael Brainard. According to Brainard, the Fed should slow down the momentum of interest rate hikes in the face of relatively lower inflation rates which have not hit the target of 2% over the past five years. “In that case, it would be prudent to raise the federal funds rate more gradually,” she commented.
Shares of JP Morgan JPM , Bank of America BAC , Wells Fargo WFC , HSBC Holdings HSBC , Goldman Sachs GS and Citigroup C declined 2.4%, 3.2%, 1.7%, 1.7%, 2.1% and 3.6%. Losses for financial shares also weighed heavily on the Dow. HSBC possesses a Zacks Rank #2 (Buy) whereas the other companies possess a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
Possibility of another Hurricane Weighs on the Markets
The likelihood of another hurricane, Irma, hitting the coast of Florida sent home insurers stocks lower. This weighed on both the Dow and the S&P 500. Shares of Everest Group RE and XL Group XL tumbled 6.9% and 5.8% respectively. Shares of Travelers Companies TRV also tanked 3.7%, scraping off almost 31 points from the Dow. In the latest economic news, factory orders for the month of July dipped 3.3%.
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