Stocks Claw Back Steep Losses as Biotechs Lead

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As goes the oil market, so goes Wall Street. That was the mantra through much of Wednesday’s trading session as the Dow saw losses of more than 560 points at its lowest point. However, the major averages clawed back from a steep selloff in the final hour of trade.

The Dow Jones Industrial Average ended down 249 points, or 1.56% to 15766. The S&P 500 shed 22 points, or 1.17% to 1859 while the Nasdaq Composite slipped 5 points, or 0.12% to 4471.

The markets were helped by a late rally in biotechnology shares as the Nasdaq Biotechnology Index gained 2.2%, and the S&P 500 health-care sector rose 0.35%.

Meanwhile, telecommunications, utilities, and financials were the biggest losers on the session.

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Pessimism that pervaded Wall Street on Tuesday seeped into sentiment on Wednesday, sending U.S. equity markets sharply lower before they staged somewhat of a late-day rally. At session lows, the broader averages were down more than 11% year to date, with the Dow giving up 565 points.

However, in the final hour of trade, all three major averages pared those steep losses to cap the day on a more positive note than it started. Doug Sandler, chief equity officer at RiverFront Investment Group, said that’s the key to estimating when the bottom in the market is near.

“I want to see a close that’s better than the open. So today might be the first day the market opened down more than 300 points and closed down near 150 points,” he said. “We need to see that a couple more times because it tends to be ‘dumb money’ in the morning, and at the close, it’s people who have thought about their positions a little more.”

Sandler added that he watches the Nasdaq relative to the S&P 500 because he said on days when the tech-heavy index is more negative, it indicates risky stocks are doing worse than safer ones.

The biggest culprit for the selloff early in Wednesday’s session was continued downward pressure in the oil patch. Prices of U.S. crude dropped below $27 for the first time since 2003. Worrying investors is a worldwide supply glut that only looks to get worse as more production from Iran comes online after international sanctions were lifted last week.

What’s more, the International Energy Agency on Tuesday said it expects excess supply to keep the oil market oversaturated through late this year, which the IEA said could make 2016 the third-consecutive year of supply exceeding demand by one million barrels per day.

Oil prices have so far tumbled 74% from their July 2014 high, and 81% from their all-time high set in July 2008.

West Texas Intermediate crude dropped 6.71% to settle at $26.55 a barrel, off the lows of the session. That’s the lowest settlement value since May 2003 and the biggest one-day percentage decline since September.

Meanwhile, Brent, the international benchmark, declined 3.06% to $27.88 a barrel, also settling off the lows of the session, as it saw the lowest settle since November 2003.

The energy sector turned positive before the closing bell, though it had been down more than 6%, while more than half of the stocks in the sector touched their lowest level in at least a year.

Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, which oversees $20 million in assets under management, said right now, global markets are in full-fledged fear mode.

“Until we see oil stabilize, I think it’s going to be hard for any risk market to show any strength in the midst of continued weakness. Everyone is trying to figure out where the bottom is as higher-cost U.S. producers shut down oil production. Clearly the price of oil is reflecting a lot of supply and an expectation for a moderation in demand at this point,” he explained.

Weekly oil inventory data from the American Petroleum Institute was due out at 4:30 p.m.

The price action helped send global markets sharply lower on Wednesday as Japan's Nikkei, the UK’s FTSE 100, France’s CAC 40, and the MSCI All-Country World index officially joined China's Shanghai Composite in bear-market territory. A bear market is defined as down 20% from a recent high.

Meanwhile, traders rushed to safe-haven assets including gold, which saw a gain of 1.58% to $1,107 a troy ounce, while the yield on the 10-year U.S. Treasury bond fell below 2%. In recent action, the yield fell 0.057 percentage point to 1.981%. Yields move in the opposite direction of prices.

U.S. traders parsed a duo of economic reports including housing starts and consumer prices.

The Commerce Department reports starts of new home construction dropped 2.5% last month to an annualized rate of 1.15 million units, while Wall Street expected a rise to 1.20 million units. Permits to build new homes, meanwhile, slipped 3.9% to an annualized rate of 1.23 million units, a smaller decline than the 1.20 million units expected.

The Labor Department's CPI gauge showed inflation at the consumer level fell 0.1% last month, while economists expected it to remain steady. Excluding the volatile food and energy components, prices rose 0.1%, slightly lower than the 0.2% expectations.

Deutsche Bank’s economics team, in a note late Tuesday, said although they’re not forecasting a recession, their outlook on the U.S. economy has grown more cautious thanks in part to narrow GDP growth.

“The manufacturing sector is a leading indicator of the broader economy, and it is in a recession. We recently marked down our estimate of Q4 2015 real GDP 0.5%...yet in light of last week’s retail sales and inventories data, that estimate could be too high,” the note read.

The three-month annualized change in retail sales with gasoline sales stripped out, was 2.4% last month, the lowest reading since February, the team noted, while retail inventory accumulation was twice that.

“The fact that consumption is growing does not necessarily eliminate the recession risk, because other, more volatile components of GDP, namely investment and net exports, could precipitate a downturn,” they said. “There have been numerous periods when the economy went into recession and yet overall consumer spending remained positive.”

Heppenstall said there’s some worry about how the declining wealth effect, caused by the sharp drop in equity prices, will impact consumer sentiment and spending in the near term.

“Overall, lower oil should be a boost to the health of the consumer, but given the pace of the decline, there’s so much uncertainty about what the implications are for what had so far been a growth area for the U.S.,” he said. “The picture with the size of the decline is not perfectly clear.”

He added that the best strategy for investors on days with wild swings: Be patient, don’t sell.

“Make sure you’re diversified,” he said. “Volatility was extremely low in the market, so we’re a little overdue for periods of heightened volatility. Stay the course here. If you have an asset allocation and risk appetite, set up your portfolio to invest through periods like this. Don’t try and react to one or two days of market activity.”

Sandler said that strategy is especially true for retail investors who tend to see volatility as a signal to sell.

“Nothing could be further from the truth. Volatility is the worst time [for retail investors] to react…when you have a lot of levered players rushing for the exit to get out at once, there’s no reason mom and dad have to feel like they have to jump into the middle of the shark tank, too.”