Wall Street Close: Stocks slip amid profit taking ahead of key risk events later this week

• All three major US stock indices dropped amid profit-taking on Tuesday with the tech sector underperforming.
• Position adjustment ahead of key risk events later in the week was likely to have also been at play.

US equity markets sold off in the final hour of trade, with the S&P 500 dropping to fresh session lows in the 3870s to close the session down 0.73%, the Nasdaq 100 dropping back below the 13,100 level to end the session with losses of around 1.7% and the Dow dropping a more modest half a percent. As indicated by underperformance in the Nasdaq 100, the tech sector underperformed on Tuesday, with the likes of Apple (-2.1%), Facebook (-2.2%), Amazon (-1.6%), Tesla (-4.5%) and the semiconductor sector (SOX index down 3.0%) all performing poorly.

Driving the day

Tuesday’s drop comes in wake of Monday’s powerful rally, which saw the S&P 500 post its strongest one-day percentage gain since June 2020 and, as a result, market commentators have chalked up the day’s moves to profit-taking. Position adjustment ahead of key risk events later in the week was also likely a factor; Wednesday sees the release of the ISM Services PMI report for February, a timely update on the state of the US’ service sector recovery, as well as February’s ADP National Employment Change estimate, a release that helps set expectations for the NFP release later in the week. Thursday sees Fed Chair Jerome Powell (expected to reiterate the dovish Fed script whilst now showing any concerns about rising bond yields) plus Weekly Jobless Claims numbers and Friday sees the release of the February Labour Market Report, which will be the main event of the week from a global macro perspective.

US Equity Market Fundamentals Update

The US Congress remains on track to pass US President Joe Biden’s $1.9T stimulus package into law by the middle of this month; Leader of the Senate Democrat Majority Chuck Schumer said on Tuesday that he expected the Senate to vote in favour of Biden’s stimulus bill on either Friday or Saturday, where it would be sent back to the House to start the second round of the voting procedure. Several senior Senate Democrats are expected to offer an amendment to Biden's stimulus bill that would be identical to the “Raise the Wage Act” with the aim of increasing the national minimum wage to $15 per hour, though this is not expected to pass. As Biden’s stimulus package passes into law, this is expected to keep equity market sentiment buoyant.

In terms of the latest commentary from Fed members; influential FOMC member Lael Brainard spoke in a webinar earlier in the session and made some interesting comments regarding recent bond market moves, noting that last week’s bond market move caught her eye and commented that if there was a persistent tightening of financial conditions, this could slow progress towards job and inflation goals. Meanwhile, FOMC member Mary Daly talked about how the Fed could potentially use operation twist (where the Fed increases the average weighted maturity of the treasuries it is buying) as a first tool if monetary conditions became less accommodative and did not rule out the use of yield curve control as a potential option.

QE talk from Fed members appears to have supported US treasury markets, with yields dropping sharply into the close (5-year -5bps, 10-year -5.1bps and 20-year -4bps). The fact that Fed rhetoric has been supportive of bond markets implies it ought also to offer some support to stocks going forward.

Finally, in terms of the latest regarding the pandemic; new US Covid-19 infections continue to drop (came in at just above 50K for a second consecutive day) and the vaccine rollout continues to accelerate (Tuesday saw 1.7M vaccinated, taking the total of vaccinations administered to 78.6M). Meanwhile, lockdown continues to ease across the country; most notably, San Francisco is to allow a number of non-essential businesses to reopen and the Governor of Texas called for the state to open “100%”. As long as the US continues towards reopening and herd immunity, this ought to support risk appetite.