Major Averages Flirt with Correction Territory as Caterpillar Weighs

The major U.S. averages were pushed back closer to correction territory on Thursday – down 10% from a recent high – as investors parsed the latest economic reports and restructuring news from Caterpillar.

The Dow Jones Industrial Average dropped 77 points, or 0.48% to 16202. The S&P 500 shed 6 points, or 0.33% to 1932, while the Nasdaq Composite declined 18 points, or 0.38% to 4734.

As Caterpillar shares plunged, so too did the industrials sector, which saw some of the biggest declines alongside materials and health care. Utilitites, energy, and consumer discretionary were in positive territory, as volume on the Street ran about 10% higher than the one-month average.

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Industrials dropped nearly 2% as Caterpillar (NYSE:CAT) shares plunged as much as 7%, weighing heavily on the sector. The manufacturing giant announced on Tuesday it planned to slash its workforce, with a total possible reduction of more than 10,000 people. The company also lowered its 2015 outlook. It now sees sales and revenue around $48 billion compared to a previous estimate of $49 billion.

The company’s chief executive, Doug Oberhalman said Caterpillar is “facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy.”

Also weighing on the construction-equipment maker was a report from Axiom Capitol, which initiated coverage on the company with a sell rating and a price target of $28. The note reportedly compared the company to Lucent during the dot-com bubble.

Matthew Kaufler, portfolio manager at Federated Investors, said Caterpillar’s move is not the first of its kind, and warned the Street to expect more of it in the coming months during a “rocky” upcoming earnings season.

“You’re going to see similar moves by other companies that are exposed to commodities globally,” he said. “My sense Is that this Caterpillar announcement is a precursor to more announcements for anyone with exposure to selling heavy equipment to the oil and gas industry in particular, and to the mining industry. They’ll come up short if not on numbers then on guidance. We’ll have more days like this.”

Wall Street followed global markets lower, though there wasn’t a particular catalyst driving momentum. As with the last week of trading since the FOMC’s decision to hold short-term rates at historic lows, markets have been searching for information to give them a direction.

Larry Shover, chief investment officer at Solutions Funds Group, said the fundamental landscape isn’t as gloomy as it’s sometimes made out to be, but the markets are still moving on two issues on which it needs to see more clarity: China’s economic growth and liftoff timing for the Fed.

“Remember the recent bout of instability can trace its bloodline back to the August 17 yuan devaluation while the Fed’s indecisive and muddled message on September 17 only exacerbated the market’s angst,” he said.

At 5:00 p.m., Fed Chief Janet Yellen was scheduled to speak at the University of Massachusetts to deliver the annual Phillip Gamble Memorial Lecture. The appearance will be Yellen’s first since the FOMC’s decision last Thursday. While there won’t be time for a question-and-answer session, any clues on when the central bank might hike rates would be welcome from the markets.

“I believe the committee intended the no-hike decision to be a simple matter of prudent risk management, not a significant change in the rate normalization strategy, and I thus expect Yellen’s speech will attempt to reinforce this message,” Shover said.

In recent action, the yield on the benchmark 10-year U.S. Treasury bond declined 0.047 percentage point to 2.097%.

In the hours leading up to the Fed Chief’s speech, markets will closely monitor economic reports as the central bank has reiterated time and again its dependence on data before it decides to raise rates.

Traders got the latest look at weekly jobless claims data, which showed an increase to 267,000 claims last week from an unrevised 264,000 the week prior. Wall Street had forecast a steeper rise to 271,000. The latest data on durable goods from the Commerce Department, meanwhile, showed a 2% drop in August, matching expectations. Excluding the volatile transportation component, orders were unchanged from the month prior, compared to expectations for a 0.1% tick higher.

New home sales data, also from the Commerce Department, showed a bigger increase than anticipated. Sales of new single-family homes rose 5.7% during the month to an annualized rate of 552,000 units compared to expectations for an increase to 515,000 units.

“The overall global macro backdrop is soft around the edges and the numbers that came out in terms of our own economy were in line, but I wouldn’t call durable goods robust…there are certainly some positives with respect to our own economy, but I think the markets had a big run off the lows of the last six years and we’re going through a correction phase,” Kaufler said.

Elsewhere in equity markets, European stocks were lower amid reports other auto makers could feel pain from emissions-related headlines that forced Volkswagen’s CEO to leave his post on Wednesday.

The Euro Stoxx 50, which tracks large-cap companies in the eurozone fell 1.97%, while the German Dax dropped 1.99%, the French CAC 40 declined 1.99%, and the UK’s FTSE 100 slipped 1.09%.

Asia markets were mixed after a reading on Japan’s preliminary manufacturing PMI came in under expectations, though still in expansion territory,  at 50.9 from 51.7 in August.

Japan’s Nikkei dropped 2.76%, while China’s Shanghai Composite, however, rose 0.86%, while Hong Kong’s Hang Seng paced 0.97% lower.

In commodities, global crude oil prices sagged after a sharp decline in the prior session. U.S. crude rose 0.13% to $44.53 a barrel, while Brent, the international benchmark, rose 0.29% to $478994 a barrel.

Metals were higher as gold rose 1.86% to $1,152 a troy ounce. Silver rose 2.27% to $15.13 an ounce, while copper rose 0.30% to $2.30 a pound.

The dollar rose against a basket of global currencies while the euro advanced 0.55% against the greenback.