U.S. stocks closed about 1 percent lower on Tuesday as investors eyed higher bond yields, mixed domestic data and renewed concerns over Greece.
“We had a bad trade number this morning, (indicating) first quarter GDP actually negative,” said David Kelly, chief global strategist at J.P. Morgan Funds. “That might be part of the story.”
The major averages failed to hold above psychologically key levels and closed below their 50-day moving averages. The Dow Jones industrial average closed below 18,000, off 142 points after an earlier decline of more than 150 points.
The Nasdaq underperformed, falling about 1.5 percent to close below 5,000. The iShares Nasdaq Biotechnology ETF (IBB) fell more than 2 percent. Apple was the worst-performing blue chip, while other tech giants Microsoft and Google also declined sharply. The S&P 500 failed to stay above the key 2,100 level.
The Russell 2000 fell more than 1.5 percent to below its 50-day moving average. The Russell gave back recent gains to trade near last Thursday’s lows and up less than 1 percent for the year. Earlier in the year, the index of small-cap, domestically-focused firms had hit records with the strengthening dollar.
The Dow transports closed down 1.5 percent, with oil settling above $60 a barrel for the first time since December 2014.
European equities closed sharply lower on Tuesday as investors weighed Greece news despite good earnings from banking giants HSBC and UBS.
In the continuing Greek debt drama, stocks and bonds sold off in Athens on news the International Monetary Fund may cut a funding lifeline to Greece unless its European partners accept more debt writedowns, the Financial Times reported. Germany’s finance minister later rebuffed the report.
“The halo effect of a weaker Europe based on Greece chatter is hard to recover from,” said Art Hogan, chief market strategist at Wunderlich Securities.
Nick Raich, CEO of The Earnings Scout, noted weakening earnings trends in biotech and technology stocks from the strong dollar and a slowdown in global growth, particularly in China.
“A lot of people are bullish but the market has not reset to lower growth,” he said, noting the morning’s large trade deficit report “was a trigger for some of the selling we had today.”
The March trade deficit came in at $51.4 billion, above expectations and the largest since 2008 as imports surged. February’s figure was increased slightly to $35.9 billion from $35.4 billion.
“Bottom line, notwithstanding the smoothing which puts the deficit at a level not much different than the two prior quarters, first quarter GDP estimates will have to be revised lower, possibly sharply,” Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.
Economists on average now believe that the U.S. economy contractedslightly in the first quarter, according to a Moody’s/CNBC survey.
Still, in a relatively quiet period at the tail end of earnings season and ahead of Friday’s important employment report, J.P. Morgan’s Kelly said “overall the fundamentals still support the market going up further.”
“I think the market is stuck in this trading range,” said Peter Cardillo, chief market economist at Rockwell Global Capital. “Just in a waiting mode due to employment (data) on Friday.”
Paul Nolte, portfolio manager at Kingsview Asset Management, looked beyond Tuesday’s selloff in stocks to whether or not Friday’s report shows wage gains.
“Really, until we prove otherwise, I’m going to look at this as a pause in the market rather than a correction,” he said.
Data for the second quarter has been more encouraging. April’s non-manufacturing ISM hit a five-month high, coming in at 57.8 versus the expected 56.3 and March’s 56.5.
“I think the ISM numbers maybe give us a preview of what to expect (from nonfarm payrolls),” JJ Kinahan, chief strategist at TD Ameritrade said earlier. “Everything until Friday is just a bit of background noise.”
The pace of expansion in the U.S. services sector eased from a seven-month high in April on a dip in new business growth, but hiring in the sector accelerated to its highest since June, Financial firm Markit said.
Longer-term bond yields extended gains after the economic reports, with the U.S. 10-year Treasury yield hitting a high of 2.22 percent for the first time since March 10. The gains followed the German 10-year bund yield, which climbed to 0.51 percent. The U.S. dollar traded flat against major world currencies, with the euro near $1.11.
“At this point the market has begun to be fairly confident that the Fed is going to raise rates in the next three to five meetings,” said Jeffery Elswick, director of fixed income at Frost Investment Advisors. “At some points yields need to reprice somewhat higher. The bottom line is the market has become accustomed to pretty poor first quarter growth numbers. As we head into the second quarter I think the market is confident enough in that the Fed can raise rates.”
Elswick expects the Fed to increase short-term interest rates in the second half of the year, possibly in July or October when no press conference is scheduled.
“Rising interest rates should be a major headwind for stocks under the headwind of slow growth,” Boockvar said. “I’m surprised the market is not down more, to be honest.”
5-day performance for US 10-year Treasury yield
Despite a near 30 basis point jump in the 10-year Treasury note yield in the last week, Tuesday’s level held around the 50-day moving average.
“We’re still in a wait-and-see mode,” Hogan said. If the data is good, “I think the market does like that because I think you’d be hard pressed to find enough data that will shift a rate hike back into June. We’re in a zone where good news is good news.”
Walt Disney closed mildly lower after jumping to an all-time high on quarterly earnings and revenue that topped analysts’ expectations on Tuesday.
|DJIA||Dow Jones Industrial Average||17928.20||
|S&P 500||S&P 500 Index||2089.46||
|NASDAQ||Nasdaq Composite Index||4939.33||