U.S. stocks fell on Thursday led by the energy sector, as the market’s strong momentum to begin February started to lose steam.
The Dow Jones Industrial Average dipped 80 points from a record high, and the S&P 500 fell 0.1%. Energy was the worst-performing sector, sliding more than 1%. The tech-heavy Nasdaq Composite traded flat.
After a strong runup in equities in the beginning of February, the market rally seemed to unwind. The Dow advanced slightly Wednesday to eke out a record high, bringing its monthly gains to nearly 5%. The S&P 500 and the Nasdaq closed lower in the previous session.
“We pulled a lot of optimism forward, and the market is trying to figure out where we go from here,” said Gregory Faranello, head of U.S. rates trading at AmeriVet Securities. “The fiscal and monetary side of the equation seems priced into the market. Going forward, we need to see a broader economic recovery, a broader reopening and a broader dissemination of the vaccine.”
Investors also digested a worse-than-expected reading of weekly jobless claims. First-time claims for unemployment insurance totaled 793,000 last week even amid declining Covid-19 cases. Economists polled by Dow Jones expected a total of 760,000.
The market rallied to record levels this month as investors anticipated that any additional fiscal relief measures would support equities further. The S&P 500 has gained 3.8% this year so far, while the Russell 2000 jumped more than 14% year to date as beaten-down small caps rotated into favor with rising reopening optimism.
“There are concerns that the combination of the reopening and possibly $1.5 trillion in stimulus in the pipeline could cause an overshooting, which would lead to higher long bond yields and higher interest rates,” said Ross Mayfield, investment strategy analyst at Baird. “Then that becomes a headwind to the equity markets.”
The federal budget deficit is projected to total $2.3 trillion in the 2021 fiscal year, a decline from last year but still well above anything the U.S. had seen prior to the Covid crisis, the Congressional Budget Office reported Thursday. The total also does not include the $1.9 trillion in relief spending that President Joe Biden has proposed.
Federal Reserve Chairman Jerome Powell said Wednesday that the economy faces challenges in the labor market, and so monetary policy needs to stay “patiently accommodative.” In remarks at the Economic Club of New York, Powell said the employment picture is a “long way” from where it needs to be.
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