Renewed growth fears push down stocks, ending recent lull

Analysts say anxiety about upcoming trade talks and a slowing world economy could continue to hurt sentiment.

  • By Amrith Ramkumar,
  • The Wall Street Journal
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Tuesday’s drop for U.S. stocks ended a recent stretch of listless trading, underscoring worries that a slowdown in economic activity will prevent major indexes from rising to new peaks.

The S&P 500 (.SPX) fell 1% in midday trading and was on track to end a 12-session streak without a move up or down larger than 0.75%. The streak through Monday was the longest since July, according to Dow Jones Market Data. The broad equity gauge had averaged daily moves of 0.2% each of the previous two weeks and inched down less than 0.1% Monday as analysts waited for a catalyst that could push the indexes out of a narrow trading range.

Weak consumer-confidence figures and downbeat manufacturing data around the world sparked Tuesday’s declines. While faith in consumer spending and hopes for a trade deal with China have generally held stocks steady, some analysts are skeptical the world’s two largest economies can reach a cease-fire on tariffs.

Some analysts are also wary Tuesday’s moves could induce more outsize swings like the ones that punctuated trading in August. The S&P averaged a daily move of at least 0.7% in the five weeks through Sept. 6 as investors followed the tit-for-tat trade developments between the U.S. and China.

As stocks slid Tuesday, investors favored the safety of bonds and gold, returning to the safe-haven assets that have surged in recent months. That movement pushed down bond yields, which fall as prices rise. The yield on the benchmark 10-year U.S. Treasury note was on track for its sixth drop in the past seven sessions.

The swings come as the U.S.-China trade war has dented business spending and manufacturing activity, and many project lukewarm earnings for large companies in the quarters ahead. Those projections have coincided with a slowdown in global trade that has made some investors concerned that weakness overseas will eventually spread and limit the stock market’s gains.

“We don’t have dynamic news globally to drive us higher,” said Ed Cofrancesco, president and chief executive of International Assets Advisory. “It’s a limiting factor.”

Mr. Cofrancesco said his firm is still overweight on U.S. stocks—meaning it holds a higher position than the benchmark it tracks—because of the gap between economic growth domestically and in the rest of the world.

“We have never been as much in U.S. stocks as we have been the last year or two,” he said.

Even with Tuesday’s decline, the S&P 500 is still in its recent trading range, up 18% for the year and about 2% below its July record.

Developments around coming talks between the world’s two largest economies or data points that shift expectations for interest rates could cause further swings in stocks, analysts say. The Federal Reserve cut interest rates for the second time in recent months last week, but officials were divided on where rates should be in the future given ongoing trade uncertainty.

As the U.S. and China went back and forth with trade barbs last month, an index of global economic policy uncertainty developed by professors at Northwestern University, Stanford University and the University of Chicago rose to its highest level ever. Although the two countries have calmed markets by dialing back threats and agreeing to talks next month, some analysts are skeptical the discussions will yield progress that fuels a pickup in economic activity.

Last week, the Organization for Economic Cooperation and Development cut its forecast for global growth this year to 2.9%, which would mark the slowest pace in a decade. And a survey of purchasing managers released Monday showed signs that weakness is spreading to Germany’s services sector, indicating Europe’s largest economy is on the brink of recession.

In another sign of investor angst, the Cboe Volatility Index, or (.VIX), which tracks expected swings in the S&P 500, surged 16% Tuesday. The swings are increasing focus on coming data points as investors try to gauge whether moves from earlier in the month reflected genuine optimism or an unwinding of crowded recession bets from August.

Shares of beaten-down small-cap companies and banks that are sensitive to the outlook for U.S. growth pared some of their recent advance Tuesday. The latest fall in yields hurt shares of such banks as JPMorgan Chase & Co. (JPM), which has still risen 6.8% in September, because falling yields tend to hurt lending profitability.

Outsize swings in oil prices and shares of energy companies have also sent conflicting signals about the global economy following attacks in Saudi Arabia that have disrupted production for the world’s largest crude exporter. Some analysts use crude as an economic indicator because it is crucial to transportation and shipping.

Oil prices have generally stayed in a narrow range in recent months, with tariffs prompting downgrades to demand expectations. They slid 2.5% Tuesday, with some investors also expecting trade uncertainty to limit moves in commodities moving forward, just as they do with equities.

“Unless we get more clarity on that front, I don’t think we’re going to see a massive breakout in either direction” for stocks, said Anwiti Bahuguna, senior portfolio manager and head of multiasset strategy at Columbia Threadneedle Investments.

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