Dow tumbles more than 600 points after Wednesday's rout

The stock sell-off deepened Thursday afternoon.

The Dow (^DJI) tumbled 2.38%, or 608.23 points as of 2:47 p.m. ET, shortly after shedding 698.97 points to hit a session low. The index had plummeted more than 800 points at the end of trading Wednesday. The S&P 500 (^GSPC) slipped 2.13%, or 58.64 points and is on track to post its sixth straight day of losses. Both the Dow and S&P 500 had posted their worst single-day declines since February on Wednesday. The Nasdaq (^IXIC)  fell 1.56%, or 115.02 points. 

In pre-market trading Thursday, Dow futures were down more than 300 points. However, markets turned around briefly Thursday morning after a gauge of inflation registered lower-than-expected increases.

The reading for the core Consumer Price Index, a measure of U.S. inflation, rose 0.1% month-over-month in September, short of expectations of 0.2%, according to the average of economists polled by Bloomberg. The month-over-month reading for CPI, excluding food and energy, was unchanged at 0.1%, versus average expectations of 0.2%. Core CPI registered a 2.3% annual gain, the least since February, from August’s 2.7% advance.

In theory, a lack of inflation gives the Federal Reserve a little less flexibility to tighten monetary policy through more interest rate hikes. President Trump has pointed to the Fed’s tightening of monetary policy as “crazy,” and indicated he thinks it may be contributing to volatility in the market.

“Back-to-back 0.1% core readings will cheer battered stock and bond markets, but they don’t change the likely trajectory for interest rates,” Ian Shepherdson, of Pantheon Macroeconomics, argued. “The Fed is focused on the very tight and tightening labor market and the threat of much faster wage gains, which the current zero level of real short rates will do nothing to constrain.”

The sell-off

Experts struggled to come to a consensus explanation for the equities sell-off Wednesday. However, professional traders pointed to a flurry of somewhat esoteric market factors.

“A cornucopia of reasons” being tossed out to explain drawdown include, “CTA positioning; leverage drawdown (crowded FANG names hammered, Big Shorts outperform); China (expanding CFIUS; arrest of China spy in Belgium; Renminbi nearing 7, luxury smashdown); rates repositioning (smashes growth names) amid heavy Treasury supply; technical breaches sparking stop-losses, and of course the buyback blackout,” Dave Lutz of JonesTrading Annapolis wrote in a note. 

Gregory Rowe, center, works with fellow traders on the floor of the New York Stock Exchange, Thursday, Oct. 11, 2018. The market’s recent decline was set off by a sharp drop in bond prices and a corresponding increase in yields last week and early this week. (AP Photo/Richard Drew)

To break some of this down, some experts said that the sell-off was a correction for stocks that had been disproportionately overbought and overvalued throughout the year.

“A number of sectors (IT, Health care and Consumer Discretionary) had deviated from trend for some time (over-bought), it was only when fund inflows into these respective sectors had also deviated from trend (over-owned) that the market was primed for a correction,” Jefferies analyst Sean Darby wrote in a note. 

Big technology names in particular that had “propped indices up all year long reversed course” on Wednesday, Jamie Cox of Harris Financial Group told Yahoo Finance. He cited Amazon (AMZN) and Netflix (NFLX) – down 6.15% and 8.38% at market close Wednesday, respectively – as two stocks that “had really, really bad days. And that’s actually rather overdue and sort of what you would see in a normal correction.”

While analysts were not able to point to a specific global event catalyzing the sell-off, macroeconomic factors that had been brewing for at least the past few weeks may have played a role.

Yesterday’s correction was primarily a “‘U.S. growth-off’ event,” Goldman Sachs analyst Charles Himmelberg wrote in a note. “This growth repricing helps square the circle with last week’s sharp repricing of monetary policy and oil supply.” 

Our conversations with clients suggest to us that the macro themes driving last week’s repricing were under-appreciated,” Himmelberg said. “The visibility of monetary concerns in 2-year Treasury yields, for example, was clouded by the concurrent concerns over oil supply (which tend to depress yields). Disentangling such signals is the task for which our macro factors were designed.” 

Many, however, remained optimistic that it would not cut into growth in the real economy.

“The speed of the shift in the U.S. yield curve coupled with high oil prices and short-term over-owned sector positioning has undermined share prices,” Jefferies analyst Sean Darby wrote in a note. He added that, “While there are some similarities to the February correction, U.S. real rates are still below their historical trend while the U.S. is one of the few countries seeing positive earnings revisions.”

Spillover effects are unlikely into the real economy “given that real rates are still low,” Darby said. “The bottom line is that the S&P 500 sell off shouldn’t materially affect the economy. Some favored sectors had simply become over-owned and overbought at a time when treasuries sold-off.”

STOCKS: Walgreens shares slip after sales disappoint, Delta

Shares of Walgreens (WBA) slipped after the drugstore chain posted fourth-quarter sales that fell short of expectations. The company reported revenue of $33.44 billon against expectations of $33.77 billion, according to the average analyst expectations as polled by Bloomberg. Adjusted earnings came in at $1.48 per share, beating expectations by 3 cents. Walgreens’s stock pared some losses midday Thursday, falling 0.15% to $72.20 per share as of 2:24 p.m. ET.

Walgreens faces competition from CVS Health (CVS), which received preliminary approval from the Justice Department on Wednesday for a $69 billion acquisition of Aetna (AET), as well as Amazon, which announced plans to acquire online pharmacy PillPack over the summer. Walgreens, for its part, is focusing on smaller partnerships including health insurer Humana and UnitedHealth Group’s urgent care segment, MedExpress.

Shares of Delta Air Lines (DAL) rose after the company announced third-quarter profits that beat Wall Street expectations, with higher revenues boosted by increased travel demand and higher fares. The carrier’s net income rose 13% year-over-year to $1.31 billion for the three months ending September 30, while revenue rose 8% to $11.95 billion. The closely watched carrier metric of revenue-per-seat climbed 4.3% for the quarter from the year prior. Shares of Delta rose 3.84% to $51.64 each as of 2:25 p.m. ET.

ECONOMY: Jobless claims rise

More Americans filed for unemployment last week than expected, with the number of new claims rising to 214,000 from 207,000 the week prior. The average prediction by economists polled by Bloomberg was 207,000 for the week ending October 6.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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