Stock Market Update

[BRIEFING.COM] Each of the major indices fell more than 3.5% on Wednesday in an orderly retreat fueled by profit-margin concerns. The Nasdaq Composite (-4.7%) and S&P 500 (-4.0%) were hit the hardest, followed by the Dow Jones Industrial Average (-3.6%) and Russell 2000 (-3.6%). 

Target (TGT 161.61, -53.68, -24.9%) was the main culprit today, as shares dropped 25% after the company missed EPS estimates amid elevated cost pressures that it expects to persist in future quarters.

That was reminiscent of Walmart (WMT 122.43, -8.92, -6.8%) yesterday, eliciting a belief that if these high-profile consumer companies are struggling in the inflationary environment, then the pain could be more widespread and possibly lead to decreased consumer demand down the road. 

As such, the S&P 500 consumer discretionary (-6.6%) and consumer staples (-6.4%) sectors were by fear the weakest performers, bearing losses of over 6.0%. The information technology sector (-4.7%) was another important laggard since it is the most heavily-weighted sector in the market. 

The defensive-oriented utilities sector (-1.0%), which traded higher intraday, eventually turned lower as there remained a dearth of buying interest into the close. Buyers were largely on strike amid the inflation-induced growth concerns while investors braced for further downside as shown by the 18.6% pop in the CBOE Volatility Index (30.96, +4.86).  

Higher costs, and affordability issues, also presumably contributed to a 3.2% m/m decline in building permits for April and an 11.0% drop in the weekly MBA Mortgage Applications Index. On a related note, the EIA reported an unexpected draw in weekly crude inventories, but oil prices still fell 2.6%, or $2.86, to $109.35/bbl amid de-risking and profit-taking efforts. 

In other earnings news, Lowe's (LOW 183.82, -9.99, -5.2%) fell in sympathy with Target and the broader retail space despite beating EPS estimates. TJX Cos. (TJX 60.19, +4.01, +7.1%) was an individual bright spot, reassuring investors that its profit margins are healthy with an improved pre-tax margin outlook for FY23.

The inflation narrative, of course, maintained rate-hike expectations, which nudged the fed-funds-sensitive 2-yr yield higher by one basis point to 2.68%. The 10-yr yield fell eight basis points to 2.89% amid growth concerns (which were put on hold yesterday) and safe-haven interest. The U.S. Dollar Index rose 0.5% to 103.90.

Reviewing Wednesday's economic data:

• Total housing starts declined 0.2% month-over-month in April to a seasonally adjusted annual rate of 1.724 million units (Briefing.com consensus 1.775 million). Building permits decreased 3.2% month-over-month to 1.819 million (Briefing.com consensus 1.820 million).
  • The key takeaway from the report is that building permits -- a leading indicator -- were down month-over-month for single-family units in every region, underscoring the hesitancy on the part of builders to construct new units in the face of high costs for labor and materials and rising mortgage rates that have created affordability and demand pressures for buyers.
• The weekly MBA Mortgage Applications Index dropped 11.0% following a 2.0% increase in the prior week.

Looking ahead, investors will receive weekly Initial Claims and Continuing Claims, Existing Home Sales for April, the Philadelphia Fed Index for May, and the Conference Board's Leading Economic Index for April on Thursday. 

• Dow Jones Industrial Average -13.3% YTD
• S&P 500 -17.7% YTD
• Russell 2000 -21.0% YTD
• Nasdaq Composite -27.0% YTD