Stocks suffered their second worst decline of the year on Thursday as traders went into “risk off” mode. And as is usually the case when rallies become extended and volatility is low – everyone appeared to make the exact same trade at the exact same time.
To be sure, it’s been awhile since investors have had two deal with a 1.5% decline on the S&P 500 (or a 2% drop over on the Nasdaq 100), let alone two 1% drops within a span of just six trading sessions. And for those keeping score at home, this remains one of the longest periods in history without a 3% and/or 5% corrective phase. As such, the question of the day is if Thursday’s dance to the downside was the start of an overdue pullback or simply another day of hedge fund follies.
While no one can know the answer to this question in advance, I’ve found over the years that trying to understand the reasoning behind a big dive helps in trying to figure out if the move might have legs. From my perch, it looks like there are five issues at work here…
Earnings Matter: In case you missed it, there were some high-profile earnings disappointments from the likes of Cisco Systems (CSCO), which reported lower revenues; Wal-Mart (WMT), which experienced lower profit margins; and NetApp (NTAP), who cut sales guidance. In addition, big names like Goldman Sachs (GS) helped put the major indices on the defensive early in the session.
Terror in Barcelona: In what appears to be the new trend in terror attacks, a member of the Islamic State drove a van into a crowd in Barcelona. Reports indicate there were 13 fatalities and more than 50 injured in what was immediately deemed a terrorist action. While it sounds cold, stocks haven’t been moved much lately when such events occur. But with an overbought market and weak seasonality, the bears have been looking for any reason to begin hitting the sell button.
Chaos in Trump’s Administration: Next came the big, market moving story; the rumors that Gary Cohn, the ex-Goldman exec who is viewed as business- and Wall Street-friendly as well as a major force in the Trump administration, was ready to walk in protest over Trump’s handling of the Charlottesville incident. During the President’s recent news conference, Mr. Cohn was visibly uncomfortable during what has been described as a very strange exchange with reporters.