Feb 2, 2018
U.S. stocks sold off sharply on Friday with the main benchmarks suffering their biggest one-day drops in more than a year and posting the steepest weekly losses in about two years.
The selling, which traders called orderly, continued throughout the session, as investors digested a stronger-than-expected jobs report that stoked inflation fears and contributed to a continued rise in bond yields.
The U.S. economy added 200,000 jobs in January with the best news coming from the wage growth. Average hourly wages rose 0.3%, pushing the yearly increase to 2.9%, the fastest pace in more than eight years.
Analysts said the market may be pricing in tighter monetary policy if inflation driven by wage growth accelerates.
What are the main benchmarks doing?
The S&P 500 index SPX, -2.52% fell 59.85 points, or 2.1%, to close at 2,762.13 and booked a 3.9% weekly loss. Friday’s decline was the biggest one-day drop since September 2016. The benchmark index is down 3.9% from its all-time high set last Friday, with this pullback marking the first of this magnitude in 14 months.
Losses on Wall Street were broad-based with all 11 main sectors finishing with losses. Energy stocks sold off following a drop in oil prices. The Energy Select Sector SPDR Fund XLE, -2.04% fell 4.5%, its worst one-day drop since Jan 25, 2016.
Technology shares suffered a 3% decline after disappointing earnings and outlook from big tech companies.
The Dow Jones Industrial Average DJIA, -2.93% dropped 665.75 points, or 2.5%, to end at 25,520. The blue-chip index declined 4.1% over the week. All 30 Dow components finished in negative territory on Friday.
The Nasdaq Composite Index COMP, -2.43% slid 144.92 points, or 2%, to end at 7,240.95 and was down 3.5% over the week. The weekly declines for the S&P 500 and the Dow were the largest since the week ending Jan. 8 2016, while the drop for the Nasdaq was the biggest since the week ending Feb. 5, 2016.
Implied volatility on the S&P 500, as measured by the Cboe Volatility Index, or VIXVIX, +3.68% surged 29% to 17.39, the highest reading since November 2016.
What are strategists saying?
“A big wage growth number is the biggest risk to the stock market rally, because it means the Fed may get more aggressive in raising interest rates,” said Kristina Hooper, chief global market strategist at Invesco.
“The details of this jobs report, especially the numbers behind the wage growth suggest that companies are competing for workers and the shortage of skilled workers is pushing up wages. The trend in inflation is ticking higher and the big question is whether the incoming Fed, which is more hawkish, will allow the economy run hotter in the short term or tighten aggressively,” said Quincy Krosby, chief market strategist, at Prudential Financial.
Some traders said the selling on Wall Street was orderly.
“This feels like a correction. Markets had been really overextended and right now is a perfect time for a pullback,” said Joe Saluzzi, partner, co-head of Equity Trading at Themis Trading.
“People had been waiting for long-dated yields to rise and they are finally rising. There is nothing unexpected about it, but the market is letting some of the steam out after a big rally,” Saluzzi said.
Which stocks look like key movers?
Shares in Amazon Inc. AMZN, -1.11% climbed 3% after the e-commerce retailer posted fourth-quarter profit and revenue that blew past forecasts.
Apple Inc. shares AAPL, -0.50% fell 4.4% after the iPhone maker reported record earnings thanks to sales of the iPhone X, but its forecast fell short of expectations.
Mattel Inc. MAT, +0.78% surged 7.9% even after the toy maker posted a steep sales decline during its important holiday period.
Exxon Mobil Corp. XOM, +0.01% earnings fell short of estimates, despite tax benefit. Shares were down 5.1%.
Phillips 66 PSX, -1.51% shares fell 3.8% even as the company released earnings above Wall Street’s expectations.
What is driving markets?
Stocks took a hit as global government bond yields, which have dogged stocks this week, continued to climb on Friday. The yield on the 10-year U.S. Treasury noteTMUBMUSD10Y, +0.29% rose to a four-year high above 2.83%.
Meanwhile, the yield on 10-year German government bunds TMBMKDE-10Y, +0.45% added 4 basis points to reach 0.76%, close to levels not seen in more than two years.
What are other assets doing?
European stocks SXXP, -0.95% slumped, driven by a 1.3% slide for the German DAXDAX, -1.34% in part dogged by Deutsche Bank’s hefty loss. Asian markets saw a mixed session, with the Nikkei 225 index NIK, -4.51% down 0.9% on disappointing earnings. Gold US:GCG8 prices fell 1% to $1,334.30 an ounce, mostly thanks to a jump in the ICE U.S. Dollar Index DXY, -0.14% which rose 0.6% to 89.21. Oil futuresUS:CLH8 dropped 1.1% to $65.07 a barrel.