Wall Street stocks fell on Wednesday after stronger-than-expected services sector data fueled concerns of sticky inflation and interest rates staying higher for longer, while weakness in Apple Inc shares further weighed down the indexes.
The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing Purchasing Managers’ Index rose to 54.5 last month against expectations of 52.5, while a gauge of prices paid by service-sector businesses for inputs increased.
Traders’ bets that the Federal Reserve would pause hiking interest rates at its Sept. 20-21 meeting were 91%, while bets on a pause in November slipped to 46.8% from nearly 57% before the data, the CME FedWatch Tool showed.
“The stronger-than-expected ISM services data shows that investors are still not very skilled at reading the post-pandemic tea leaves,” said Carol Schleif, chief investment officer at BMO’s family office in Minneapolis.
While investors have been hoping for interest rate cuts soon, Schleif said the data shows a strong economy and inflation that is not coming down “as fast as the Fed would need to start cutting rates any time in the foreseeable future.”
Earlier in the day Boston Fed President Susan Collins stressed the need for the central bank to “proceed carefully” with its next monetary policy steps.
The Dow Jones Industrial Average fell 235.55 points, or 0.68%, to 34,406.42. The S&P 500 lost 40.09 points, or 0.89%, at 4,456.74 and the Nasdaq Composite dropped 179.32 points, or 1.28%, to 13,841.63.
Of the S&P 500’s 11 major industry sectors technology was the biggest decliner, down 1.6%. Defensive utilities was the only gainer, up 0.1%.
Apple was the biggest drag across the three major indexes, down 3.7% after a report that China had banned officials at central government agencies from using iPhones and other foreign-branded devices for work.
Other megacaps also declined, with Tesla, Amazon.com and Nvidia down between 1.6% and 3.8% as yields on the 10-year and the two-year U.S. Treasuries moved higher after the economic data.
The S&P 500 barely reacted after the Fed’s “Beige Book” snapshot of the U.S. economy was released, a week ahead of the keenly awaited August inflation data and the Fed’s rate decision on Sept. 20.
The report showed “modest” U.S. economic growth in recent weeks while job growth was “subdued,” and inflation slowed in most parts of the country.
A recent uptick in oil prices has also stoked fears of persistent inflationary pressures that could compel the Federal Reserve to maintain its hawkish stance on interest rates.
Lockheed Martin dropped 4.5% after the U.S. weapons maker trimmed the delivery outlook for its F-35 jets.
Roku climbed 1.9% after the video-streaming company said it would reduce its workforce by about 10% and limit new hiring.
Declining issues outnumbered advancers on the NYSE by a 2.38-to-1 ratio; on Nasdaq, a 2.10-to-1 ratio favored decliners.
The S&P 500 posted 3 new 52-week highs and 25 new lows; the Nasdaq Composite recorded 33 new highs and 146 new lows.
In the latest week, investors pulled a net $1.4 billion from the sector, the biggest weekly outflow since May 2022. That was only a little more than the net inflow of $1.3 billion to healthcare stocks in the week of Aug. 14, the second-largest weekly gain since 2008, according to BofA Global Research.
Overall, the healthcare sector - which ranges from health insurers like UnitedHealth to pharmaceutical companies like Pfizer to small biotechs - has received the third largest inflows of any sector year to date, BofA’s data showed. Still, the sector [.SPXHC] is down around 2% year-to-date, one of few areas that have not joined the broad market rally, adding to its appeal among bargain hunters.
“If you continue to see money flowing into healthcare then investors are using their feet to march to a more conservative posture given the uncertain outlook for where the economy goes from here,” said Bob Kalman, senior portfolio manager at Miramar Capital.
While U.S. growth has largely been robust this year, some investors who are bullish healthcare stocks believe that the Federal Reserve’s interest rate hikes will eventually start to weigh on the economy.
Healthcare “offers some defense in a period where the lagged impact of Fed tightening is likely to cause economic growth to contract,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management, who is bullish on the sector.
One potential sign of economic weakness came last Tuesday, when U.S. data showed job openings dropped to the lowest level in nearly 2-1/2 years in July as the labor market gradually slowed.
Less pessimistic investors noted that the economy has been resilient thus far and shows few signs of cracking. This would weaken the case for loading up on healthcare stocks.