Thursday’s markets started lower and weakness accelerated into the close, observes Jon Markman, editor of Strategic Advantage.

The benchmark S&P 500 (SPX) finished at 4,146, down 3.5%. The selling was persistent and broad. The losses erased all of the gains from Wednesday and then some. Bulls are in a bad place. They are fighting the narrative that the economy is headed toward recession and that will bring even lower stock prices.

If only it was that easy. In reality, stocks can rise substantially during periods of economic weakness. We need to look no further than 2021 when most of the economy was shuttered while the market sizzled. Unfortunately, the weak close Thursday and the fear of holding positions into the weekend opens the door for the S&P 500 to test the recent low below 4,100 as early as Friday. The path of least resistance is lower. Continue to sell rallies until bulls can sustain a rally above 4,300. 

The Upshot

The Dow (DOW) sank 3.1% to 32,997.97 and the Nasdaq (NDX) was 5% lower at 12,317.69, its biggest decline since 2020. All three indexes wiped out gains from Wednesday.

Consumer discretionary and technology were the worst sectors. Breadth favored decliners seven-one,  and there were 1142 new lows vs 93 new highs. Big caps on the new high list included Exxon Mobil (XOM), Occidental Petroleum (OXY), Marathon Petroleum (MPC), Suncor Energy (SU), and Valero (VLO). I think I see a pattern here.

The US ten-year yield soared 12.2 basis points to 3.04%, the highest intraday level since November 2018. West Texas Intermediate crude oil futures added $0.50 to $108.31 a barrel. Gold rose $9.50 to $1,878.30 per troy ounce.

"Until inflation appears to be coming under control, we'll likely see rates go up, possibly even above neutral," a research note from Desjardins said Thursday. Additional 50 basis-point rate hikes at the next two meetings "should be followed by 25-point increases into next spring."

Thursday’s decline in the S&P 500 was the 15th worst day for the index in the last ten years. Even with that, the CBOE VIX Index (VIX) did not hit the 36 level which has marked a near-term low of late. Nick Colas of DataTrek Research notes that markets can’t seem to decide if they want the Band-Aid of easy monetary policy ripped off quickly or only peeled off slowly. While markets may stabilize soon—the last two post-Fed meeting periods have seen rallies—the Thursday action tells us investors should proceed with extreme caution

The key data released for Thursday were a small increase in weekly initial jobless claims, a sharp decline in Q1 productivity, and a further gain in April layoff intentions. Initial jobless claims increased by 19,000 to 200,000 in the week ended April 30, pushing up the four-week moving average by 8,000 to 188,000, a fourth straight increase. The weekly figures have been below 200,000 since mid-February, historically an indicator of a strong labor market.

Nonfarm productivity fell by 7.5% in the first quarter after a 6.3% increase in the previous quarter as output fell 2.4% and hours worked rose by 5.5%, while Challenger, Gray, and Christmas reported 24,286 layoff intentions in April, up from 21,387 for a second straight increase.

In company news, Etsy (ETSY) reported a decline in first-quarter earnings per share even as revenue rose from a year ago, and its guidance for second-quarter sales was downbeat. Shares sank 16.8%, the most in the S&P 500.

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