Dow falls 150 points, as investors eye Powell comments Wednesday

What’s driving markets

Investors were pulling back from equities on Tuesday, following the U.S. long weekend in honor of the Juneteenth federal holiday. The S&P 500 gained 2.6% last week, its fifth week in a row of gains, as the tech-heavy Nasdaq Composite took its winning run to eight weeks.

“I think what happened is that, investors are optimistic for the longer term, but believe that we have gotten ahead of ourselves in terms of market performance and sector leadership,” Sam Stovall, chief investment strategist at CFRA Research said in a phone interview.

Investors may be thinking hard about whether the market’s recent pushes higher are for real, according to Kent Engelke, chief economic strategist and managing director at Capitol Securities Management. “How do we substantiate this rally? … In the immediacy, the market has rallied based on the belief of lower short-term interest rates by year end.”

Last week, investors learned of cooling inflation data for May and a pause on Fed rate hikes for now, but they also had to gauge the Fed’s hints that still more rate hikes could be coming this year, despite the skip in June.

The Tuesday morning stock slide was also propelled by worrying about what Powell may say in his testimony to Congress this week, Engelke added. Powell’s two days of testimony begins Wednesday.

“Powell’s comments may help shape how the market—and especially the tech sector, which has led this year’s rally—reacts to Fed policy in the near term,” according to Chris Larkin, managing director, trading and investing at E*TRADE from Morgan Stanley.

Tuesday’s U.S. economic data included housing starts data, which showed a 21.7% surge in May after a revised 2.9% drop in April. Building permits also climbed 5.2% in May. The numbers — led by a surge in the midwest — reflect strong demand and short supply in the existing home sales market.

“With the labor market less tight, supply chains functioning better, and lumber cheaper than in 2021 and 2022, homebuilders are catching up on their huge backlog of planned projects,” said Bill Adams, chief economist for Comerica Bank in Dallas.

“Looking across housing starts, permits, and the backlog of permitted but unstarted projects, homebuilding is likely to be a net tailwind to economic growth in the second half of 2023,” according to Adams.

Earlier, China cut its 1- and 5-year lending rates by 10 basis points, which investors viewed to be modest, particularly after a Friday state council meeting didn’t result in other concrete measures. According to Societe Generale, there were expectations the 5-year rate, the benchmark for mortgages, would be cut by 15 basis points.

There’s waning consumer confidence in China, according to Grant Feng, a Vanguard senior economist.

“As pent-up demand fades and external headwinds intensify, growth will be contingent upon improvement in the labor market and income growth and a gradual recovery of household and business confidence, as well as additional policy support,” Feng said.

The Hang Seng
HSI,
-1.54%
fell 1.5% in Hong Kong.

Alibaba
BABA,
-4.53%,
the Chinese internet giant, also was in the spotlight after announcing that its CEO and chairman will step down to focus on the cloud division, with Brooklyn Nets owner Joseph Tsai becoming chairman.

See: China ETFs tumble after PBOC’s rate cut disappoints markets

Companies in focus

• Alibaba Group Holding Ltd.
  BABA,
  -4.53%
  shares fell 4.5% after the Chinese e-commerce said Daniel Zhang will step down from chairman and chief executive officer roles. He will stay on to lead the cloud business, due to be spun off.

• Nio Inc.
  NIO,
  -1.38%,
  the Chinese EV maker, fell close to 1%, as U.S.-listed stocks played catchup with two days of weakness for China markets. Goldman Sachs cut its growth forecasts for the country and the People’s Bank of China on Tuesday announced cuts in lending rates, the extent of which which disappointed some.

• WeWork Inc.
  WE,
  -9.02%
  dropped more than 6% as shareholders voted overwhelmingly for a reverse stock split, according to a Securities and Exchange Commission filing on Friday.

• Virgin Galactic Holdings Inc.
  SPCE,
  +24.75%
  shares are more than 20% higher, continuing a rally from last week. The space travel company is preparing for its first commercial flight later this month.

–Steve Goldstein contributed to the report.