US stocks mostly recover from an early plunge on Wall Street

Wednesday, October 24, 2018

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NEW YORK, USA - A turbulent day on Wall Street ended yesterday with stocks climbing nearly all the way out of a steep, broad sell-off that at one point erased more than 500 points from the Dow Jones Industrial Average.

Even with the late-afternoon rebound, stocks extended the market's recent string of declines, giving the benchmark S&P 500 index its fifth-straight loss. Bond prices rose, sending yields lower, as investors sought out safer investments.

Hong Kong's Hang Seng index sank 3.1 per cent. European markets also closed sharply lower.

The latest selling came as investors grew unsettled over slowing economic growth in China and increased signs that President Donald Trump's aggressive trade policies are beginning to weigh on corporate earnings. Caterpillar and 3M slumped yesterday after the companies warned of rising costs related to tariffs.

“That's the story, it's not the current quarter results, but the commentary going forward, the impact of tariffs and what that means in terms of costs,” said Willie Delwiche, an investment strategist at Baird. “If tariffs didn't come up in earnings calls and commentary, then maybe you could say we were moving away from that, but the opposite is happening.”

The S&P 500 fell 15.19 points, or 0.6 per cent, to 2,740.69. The Dow lost 125.98 points, or 0.5 per cent, to 25,191.43. The average had been down more than 540 points.

The Nasdaq slid 31.09 points, or 0.4 per cent, to 7,437.54. The Russell 2000 index of smaller-company stocks gave up 12.91 points, or 0.8 per cent, to 1,526.59. The index is now down for the year.

Markets have been rattled in recent weeks by increased worries over the impact that rising interest rates, inflation and the escalating trade dispute between the US and China may have on Corporate America.

Trump has imposed tariffs on about US$250 billion in Chinese imports, and Beijing has retaliated by targeting US$110 billion in American products. Trump has threatened to tax another US$267 billion in Chinese products, a move that would cover virtually everything China ships to America.

The two countries are locked in a dispute over US allegations that China steals US technology and forces US companies to share trade secrets in exchange for access to the Chinese market.

Recent data show China's economic engine is growing more slowly. From July to September, it grew 6.5 per cent, the slowest pace since early 2009. The world's second-largest economy was cooling even before the outbreak of a tariff war with Washington. That contrasts with the momentum of the US economy. The government is expected to say Friday that the US economy grew by 3.3 per cent in the third quarter, after growing by 4.2 per cent in the second quarter.

The strong US economy has helped power earnings growth for companies in the S&P 500. While those companies are expected to deliver 21.9 per cent earnings growth for the third quarter, according to S&P Global Market Intelligence, investors are concerned about future growth amid rising inflation, interest rates and uncertainty over trade.

Caterpillar skidded 7.6 per cent to US$118.98 after the heavy equipment manufacturer warned that Trump's taxes on imported steel were driving up production costs.

3M fell 4.4 per cent to US$192.55 after its earnings missed Wall Street's targets. The industrial manufacturer said it expects raw material prices to continue climbing, and for tariffs to have a roughly US$100 million negative impact on the company's sourcing costs next year.

Caterpillar and 3M were, by far, the biggest decliners in the 30-company Dow average.

Losses in banks, energy and technology companies outweighed gains by internet and consumer-goods stocks. A sharp sell-off in Chinese and other global markets set the stage for the volatile day on Wall Street.

Bond prices rose, sending the yield on the 10-year Treasury note down to 3.17 per cent from 3.19 percent late Monday.

Computer-driven trading, which uses algorithms to guide buying and selling, likely drove the gradual, partial rebound toward the end of the day, said Quincy Krosby, chief market strategist at Prudential Financial.

“On the downside and the upside the algorithms are going to kick in and they really push the market in one direction or another,” Krosby said.

A big drop in oil prices weighed on energy stocks yesterday. Marathon Oil dropped 4.8 per cent to US$19.48.

Truck maker Paccar fell 5.1 per cent to US$57.40, while engine manufacturer Cummins slid 3.8 percent to US$134.64.

Communications stocks were among the biggest gainers. Verizon Communications climbed 4.1 percent to US$57.21

Traders also bid up shares in McDonald's after the fast-food chain reported third-quarter results that topped analysts' forecasts. The stock gained 6.3 percent to US$177.15.

Close to 17 per cent of companies on the broad S&P 500 index have reported earnings for the third quarter, and over half of them did better than expected.

“They're coming in ahead of expectations, generally, but the degree to which they're beating expectations is less than what it has been in previous quarters,” Delwiche said. “That's why there's some concern there.”

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