Fed's Beige Book appears to support June rate increase
U.S. stocks closed lower on Wednesday, but off their worst levels of the session, notching gains for the month as a slump in bank shares and a mixed reading of economic reports weighed on investor sentiment.
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The S&P 500 index fell 1.11 points, or less than 0.1%, to close at 2,411.80, recovering from an earlier 9-point deficit, with only four of the market gauge's 11 sectors closing lower. The financial sector finished down 0.8%, representing the worst performer, and energy shares closed down 0.4%.
The Dow Jones Industrial Average closed down 20.82 points, or 0.1%, at 21,008.65, with shares of J.P. Morgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) dragging blue chips firmly into the red with more than 2% losses. Combined, the pair of bank stocks contributed to the lion's share of the Dow's loss.
Meanwhile, the Nasdaq Composite Index , after briefly touching an intraday high of 6,221.99, finished down 4.67 points, or less than 0.1%, at 6,198.52.
For the month, the Nasdaq has been the best-performing among major indexes, up 2.5% in May, followed by a 1.2% gain for the S&P 500. Both indexes had their best monthly percentage gains since February. The Dow hung on to a meager gain of 0.3%.
Financials took a hit because two of the largest U.S. banks signaled signs of a trading slowdown on the same day, said Ian Winer, head of the equities division at Wedbush Securities. Both J.P. Morgan Chase and Bank of America Corp.(BAC) cautioned at an industry conferences on Wednesday that trading is weakening in the second quarter (http://www.marketwatch.com/story/jp-morgan-bank-of-america-signal-trading-slump-2017-05-31).
Couple that with the drop in oil prices and reports that former FBI Director James Comey will publicly testify that President Donald Trump pushed him to end the probe into former national-security adviser Michael Flynn and you have a market that is going to sell off, Winer said.
Energy shares continued their downtrend Wednesday with U.S. crude-oil prices dipping below $48 (http://www.marketwatch.com/story/oil-prices-extend-losses-as-concern-grows-over-still-heavy-global-supply-2017-05-31) and settling down 2.7% at $48.32 a barrel.
"Banks are being cautious and that has to make people a little nervous, and the market continues to plow money into the same names everyday," said Winer, citing stocks like Amazon.com Inc.(AMZN), Alphabet Inc.(GOOGL)(GOOGL), Tesla Inc.(TSLA) and Nvidia Corp. (NVDA), all of which are up 25% or more for the year.
"I'm concerned that there are quantitative models out there that are 'buy high, buy higher' so you have this strange phenomenon feeding on itself where [those stocks] become a bigger part of the S&P 500," he said.
The benchmarks took a decided turn for the worse Wednesday after a reading for pending-home sales came in below expectations. Pending-home sales (http://www.marketwatch.com/story/pending-home-sales-decline-again-deepening-housing-market-funk-2017-05-31)from the National Association of Realtors fell 1.3% to a level of 109.8 from a reduction in the March reading.
Meanwhile, a gauge of economic health, the Chicago business barometer, or Chicago PMI, rose to 59.4 in May, its highest level in 2 1/2 years (http://www.marketwatch.com/story/economy-shifts-to-merely-fast-from-furious-in-chicago-area-pmi-finds-2017-05-31). Earlier, reporting agency MNI Indicators had mistakenly said the gauge fell to 55.2. Any reading over 50 indicates improving conditions. Stocks pared gains slightly following the corrected PMI reading.
The Federal Reserve's Beige Book, or anecdotal report of regional conditions, said the economy is still growing at a "modest or moderate" pace, appearing to support a June rate increase (http://www.marketwatch.com/story/feds-beige-book-appears-to-boost-case-for-june-rate-hike-2017-05-31).
Even so, the market may be at a tipping point where a recent trend of soft data may support bearish views that economic growth doesn't warrant two additional rate hikes by the Federal Reserve in 2017, said Colin Cieszynski, chief market strategist at CMC Markets. The Fed is widely expected to lift rates in June by a quarter point.
"The question the market is grappling with is, is the Fed raising rates in an environment in which perhaps the economic data are weakening more than you should see for a rate-hike cycle?" said Quincy Krosby, chief market strategist at Prudential Financial.
"The Fed has been clear [in past policy statements] that weaker data are just noise and that we are moving toward a stronger economic backdrop but at this stage the dollar should rise; also, we see 10-year yields which haven't moved higher," she said.
Indeed, the yield on the 10-year Treasury note hit a five-week low, dropping below 2.20% on Wednesday, while the dollar, as measured by the ICE U.S. Dollar Index , a gauge of the buck against six rivals, traded lower for most of the day but was last up 0.1%.
"People are looking for reasons to buy, but it doesn't take a lot for markets to tumble back," Cieszynski said. "I think some traders are starting to throw in the towel."
Need to know:Tech rally overdone? The case for buying other stock sectors now (http://www.marketwatch.com/story/tech-rally-overdone-the-case-for-buying-other-stock-sectors-now-2017-05-31)
Read:This money manager sees no end in sight for bull market (http://www.marketwatch.com/story/this-money-manager-sees-no-end-in-sight-for-bull-market-2017-05-30).
Fed speakers: Among Fed speakers, San Francisco Fed President John Williams will give a speech on "global economic and financial challenges" at the Bank of Korea International Conference 2017 in Seoul, South Korea, at 8:10 p.m. Eastern.
Stocks to watch: Shares of Michael Kors Holdings Inc.(KORS) finished down 8.5% after the maker of high-end accessories and clothing posted a loss for its fiscal fourth quarter (http://www.marketwatch.com/story/michael-kors-shares-slide-7-premarket-after-company-swings-to-loss-2017-05-31) and spoke of a challenging market.
Energy stocks also performed poorly on the slip in oil, but pared losses a bit by the close. Shares of Transocean Ltd.(RIG) declined 1.9%, Chesapeake Energy Corp.(CHK) dipped 0.8%, and Murphy Oil Corp. (MUR) fell 1.1%.
Vera Bradley Inc.(VRA) shares finished 11% higher, despite a weak quarterly report.
Other markets: Stocks in Asia had a mixed day, while Chinese equities inched higher after a gauge of manufacturing beat forecasts (http://www.marketwatch.com/story/chinas-manufacturing-beats-forecast-stays-steady-2017-05-30). European stocks finished fractionally lower. The FTSE 100 index gave back earlier gains, closing in the red on fresh parliamentary election jitters (http://www.marketwatch.com/story/theresa-may-could-lose-majority-in-uk-election-fresh-research-finds-2017-05-31).
The pound was trading around $1.29 (http://www.marketwatch.com/story/pound-falls-again-after-pollster-predicts-may-will-lose-majority-in-election-2017-05-31), in up-and-down trade for sterling ahead of the coming U.K. election.
Gold prices (http://www.marketwatch.com/story/gold-firms-as-feds-beige-book-could-shed-light-on-rate-hikes-past-june-2017-05-31) settled up 0.8% at $1,275.40 an ounce as the dollar slumped, giving dollar-priced assets room to climb, because a weaker dollar makes those assets more attractive to buyers using weaker currencies.
--Barbara Kollmeyer in Madrid contributed to this article.
(END) Dow Jones Newswires
May 31, 2017 16:40 ET (20:40 GMT)