By Stephen Culp
(Reuters) -The Nasdaq and Nasdaq tumbled on Wednesday as plunging microchip stocks amid the potential escalation of U.S. trade conflicts with China exacerbated the ongoing rotation out of mega-cap tech-related stocks.
A report that the Biden administration is considering severe trade restrictions against China sent microchip stocks down 6.8%, marking the biggest single-day drop since March 2020.
A pullback in the “Magnificent 7” group of momentum stocks, led by Nvidia (NASDAQ:) and Apple (NASDAQ:), pushed the Nasdaq 2.8% lower, while the benchmark S&P 500 fell 1.4%.
The , which until recently underperformed the other two indices this year, held on to modest gains and posted its third straight closing high.
The blue chip average got a boost from Johnson & Johnson (NYSE:), UnitedHealth Group (NYSE:) and, despite the swooning chip sector, Intel Corp (NASDAQ:).
“(The selloff) is being driven by pressure in the chip sector, and for the first time we see it extending to small caps,” said Michael Green, chief strategist at Simplify Asset Management in Philadelphia.
“The US is increasingly talking about cracking down on China, which has exacerbated the disruption that has already begun,” Green added. “Many of the areas (of the stock market) that had been neglected are experiencing discriminatory buying.”
The small cap, which rose 11.5% in the previous five sessions, snapped its longest winning streak in more than four years, driven by renewed interest in more undervalued stocks and sectors within the stock market.
In a sign of rising investor anxiety, the CBOE Market Volatility Index briefly hit a six-week high.
Here’s a look at how much mega-cap momentum stocks and chips have outperformed the broader market this year:
On an economic level, the start of housing construction and building permits have been positively surprised, as the strength of multi-family homes compensates for the decline in the construction of single-family homes.
In a separate report, industrial production rose twice as fast as expected in June.
The data coincided with recent reports suggesting that despite signs of weakening, US economic resilience will help the Federal Reserve return inflation to its 2% target without sending the economy into contraction.
On Wednesday, the Federal Reserve published its Beige Book, which showed that US economic activity grew at a modest pace from late May to early July, but there are also signs that the labor market continues to weaken.
“The story has changed a little bit,” said Chuck Carlson, CEO of Horizon Investment Services in Hammond, Indiana. “It looks like the economy is heading for a soft landing, so let’s buy the economically sensitive stocks.”
According to CME’s FedWatch tool, financial markets have priced in a 93.5% probability that the Fed will cut rates in September.
But some monetary policymakers, while acknowledging that the central bank is moving closer to a rate cut, would prefer to see more data confirm that inflation is on a sustained downward path.
Second-quarter earnings season is picking up steam, with Johnson & Johnson posting better-than-expected earnings and revenue on strong drug sales.
The Dow Jones Industrial Average rose 243.6 points, or 0.59%, to 41,198.08, the S&P 500 lost 78.93 points, or 1.39%, to 5,588.27 and fell 512.42 points, or 2.77%, to 17,996.93.
Of the S&P 500’s 11 major sectors, technology and communications services suffered the largest percentage declines, while consumer staples led the gains.
Declining issues outnumbered advancing issues on the NYSE by a 1.39-to-1 ratio; on the Nasdaq, a 1.66-to-1 ratio favored the decliners.
The S&P 500 recorded 82 new highs in the past 52 weeks and no new lows; the Nasdaq Composite recorded 251 new highs and 37 new lows.
Volume on U.S. exchanges was 12.47 billion shares, compared to the full-session average of 11.74 billion over the past 20 trading days.
