Benchmarks finished on a mixed note on Tuesday after a Fed monetary policy report sparked concerns about “substantially stretched valuations” in Internet and bio-tech stocks. Further, Janet Yellen’s comment that federal funds rate might be raised sooner if the labor market keeps surprising the central bank dented investor sentiment. However, better-than-expected quarterly earnings results from J.P. Morgan Chase and Goldman Sachs Group ensured a positive finish for the blue-chip index.
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The Dow Jones Industrial Average (DJI.V) closed Tuesday’s trading session at 17,060.68. The Dow gained a meager 0.03% after hitting an intraday record high of 17,120. The Standard & Poor 500 (S&P 500) declined 0.2% to finish at 1,973.28. The tech-laden Nasdaq Composite Index closed at 4,416.39; dropping 0.5%. The fear-gauge CBOE Volatility Index (:VIX) went up 1.2% to settle at 11.96. Total volume for the day was roughly 6.0 billion shares, higher than this month’s average of 5.32 billion. Decliners outpaced advancing stocks on the NYSE. For 63% stocks that declined, 34% advanced.
The S&P 500 and the Nasdaq were negatively impacted after the Federal Reserve’s monetary policy report raised concerns about valuations among social-media and bio-tech companies. The report stated: “Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year”.
This resulted in a decline in Internet and bio-tech stocks. Shares of Internet television network provider Netflix, Inc. (NFLX), online travel company TripAdvisor Inc. (TRIP), Internet radio service provider Pandora Media, Inc. (P), online retailer Amazon.com Inc. (AMZN) and online trading community eBay Inc. (EBAY) decreased 0.8%, 1.3%, 1.2%, 0.3% and 0.7%, respectively.
Internet stocks from the Technology sector such as Groupon, Inc. (GRPN), LinkedIn Corporation (LNKD), Yahoo! Inc. (YHOO), FireEye, Inc. (FEYE) and Facebook, Inc. (FB) declined 0.9%, 0.8%, 0.3%, 1.3% and 1.1%, respectively.
Bio-tech stocks extended their losses on Tuesday. Shares of bio-tech companies such as Gilead Sciences Inc. (GILD), Vertex Pharmaceuticals Incorporated (VRTX) Amgen Inc. (AMGN), Biogen Idec Inc. (BIIB), Celgene Corporation (CELG) and Regeneron Pharmaceuticals, Inc. (REGN) decreased 0.9%, 1.9%, 1.8%, 2.4%, 1.8% and 1.8%, respectively. The Health Care Select Sector SPDR (XLV) declined almost 0.9%, the second biggest among the S&P 500 sectors.
Separately, momentum stock such as auto manufacturer Tesla Motors, Inc. (TSLA) also suffered losses on Tuesday. Shares of Tesla Motors declined 3.1%.
Yellen’s comments before the Senate Banking Committee further added to the bearish sentiment. She said: “If the labor market continues to improve more quickly than anticipated by the Federal Open Market Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.” However, she also added: “If economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated”.
On the earnings front, financial behemoths JPMorgan Chase & Co. (JPM) and The Goldman Sachs Group, Inc. (GS) posted better-than-expected second quarter 2014 results. Their upbeat results ensured a somewhat positive finish for the blue-chip index.
JPMorgan Chase reported earnings of $1.59 per share, beating the Zacks Consensus Estimate of $1.30. The number is also marginally less than $1.60 earned in the year-ago quarter.
Goldman Sachs Group reported second-quarter 2014 earnings per share of $4.10, significantly outpacing the Zacks Consensus Estimate of $3.07. Moreover, results were above the year-ago figure of $3.70.
Shares of JPMorgan Chase and Goldman Sachs Group went up 3.5% and 1.3%, respectively. The positive results had helped benchmarks open in the green but the Fed comments reversed investor mood.
Last Friday, banking heavyweight Wells Fargo & Company (WFC) had kicked off the earnings season for the financial sector with in-line results. This was followed by Citigroup Inc.’s (C) better-than-expected second quarter 2014 results on Monday.
According to Thomson Reuters, S&P 500 companies’ profits will grow at 5.2% for the second quarter. This was less than the company’s earlier forecast of 8.4% at the beginning of April. According to FactSet Research Systems Inc. (FDS), earnings for the S&P 500 are expected to rise 4.9% this quarter, outpacing the 2.1% rise reported in the first quarter of 2014.
Markets received mixed economic data on Tuesday. The July 2014 Empire State Manufacturing Survey released by the Federal Reserve Bank of New York indicated that manufacturing conditions improved significantly for a third successive month for New York manufacturers. The Empire State Index rose to 25.6 in July, its highest level in more than four years. This rise was also more than the consensus estimate of a rise to 15.4. The report also showed that the new orders index was little changed at 18.8 and the shipments index rose nine points to 23.6.
The U.S. Department of Commerce reported that seasonally adjusted sales of retail and food services rose 0.2% in June, less than previous month’s gains of 0.5%. Retail sales increased in June at the slowest pace since January. This rise in retail sales in June was also less than the consensus estimate of an increase of 0.6%.
The weakness in retail sales was mostly confined to auto-dealers and home-improvement stores. Auto sales dropped in June for the first time in five months. Auto sales dropped 0.3%. Excluding motor vehicles sales, retail sales increased 0.4%, less than the consensus estimate of a 0.5% increase. Sales at home-improvement outlets slipped 1.0%, the biggest decline since October 2013.
Separately, the U.S. Department of Commerce reported that business inventories increased 0.5% in May. This was less than the consensus estimate of a rise by 0.6%.
Seven out of 10 sectors of the S&P 500 ended in the red. The Consumer Staples Select Sector SPDR (XLP) led the decline as the sector dropped 0.9%. Top holdings from the sector such as The Procter & Gamble Company (PG), The Coca-Cola Company (KO) and Philip Morris International, Inc. (PM) decreased 0.1%, 0.7% and 1.6%, respectively.
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