U.S. stock investors quashed a four-session rally Tuesday as Brexit-related uncertainties resurfaced to spook the market, on a day marked by light–trading volume following Independence Day.
A sharp drop in crude-oil prices contributed to the overall sentiment, weighing on energy shares.
“It’s an emotionally-driven trade. They aren’t sure of the ramifications of Brexit so people are shooting first and then asking questions afterwards,” said Sahak Manuelian, managing director of equity trading at Wedbush Securities.
The S&P 500 index SPX, -0.68% lost 14.40 points, or 0.7%, to close at 2,088.55. The large-cap index had dropped to a low of 2,080 during the session.
The Dow Jones Industrial Average DJIA, -0.61% fell 108.75 points, or 0.6%, to end at 17,840.62, bouncing back from its intraday low of 17,785. The Nasdaq CompositeCOMP, -0.82% lost 39.67 points, or 0.8%, to close at 4,822.90, after trading as low as 4,797.
A total of 6.8 billion shares traded hands Tuesday versus the daily average of 7.7 billion so far this year. Light volume combined with nervous investors can magnify the market’s moves, according to analysts.
Bob Pavlik, chief market strategist at Boston Private Wealth LLC, which oversees $6.5 billion in assets, attributed some of the selling pressure to short-term profit-taking following the recent multisession gains.
“Last Tuesday and Wednesday were about irrational exuberance but then I think there is a little bit of realization that nothing’s been resolved which is why there is so much money going into Treasurys,” Pavlik said.
Indeed, the yield on 10-year U.S. government bonds TMUBMUSD10Y, -3.11% closed at a record low at 1.367%, as investors sought the safety of government bonds, driving yields to globally to record lows. Treasury yields move in the opposite direction of prices.
“Investors don’t buy stocks and bonds at the same time. One of these markets is telling a different story than the other,” said Art Hogan, chief market strategist at Wunderlich Securities. “Today there’s a recalibration of that thought process.”
Equities were aligning with currency and bond markets after becoming dislocated during a liquidity-driven rally last week, when equities moved higher even as government-bond yields fell to record lows and a selloff in the British pound continued.
The fact that the U.K. government doesn’t have a clear-cut plan on how to proceed with Brexit is contributing to market’s uncertainties, Robert Wood, U.K. economist at Bank of America Merrill Lynch, said in a note. The term “Brexit” refers to Britain’s June 23 vote to exit the EU.
“Currently there seems to be no plan for what to do next, and no prospect of a plan for the foreseeable future. This is not good news for an economy likely turning down while running a large current-account deficit,” said Wood.
U.S. markets were closed on Monday in observance of Independence Day, but stock futures still traded and logged small gains. Those moves came after both the Dow average and S&P 500 index scored their best weekly performances of 2016 last week, recouping some of the steep losses logged in the wake of the U.K.’s vote to leave the European Union.
Analysts expect investors to continue to focus on Brexit without any new catalysts in the market.
“Until we get more clarity on the corporate sector from second-quarter earnings, it will be more of the same,” said Manuelian who expects the market to remain volatile in the near term.
The highlight of the week is the nonfarm payrolls report out on Friday. After a puny 38,000 jobs were added to the economy in May, economists polled by MarketWatch forecast 175,000 jobs were added in June.
Friday’s report will attract even more attention than usual, Hogan said, as investors try to determine whether last month’s report was an aberration, or if the beginning of a shift toward a “new normal” of weaker jobs growth.
Minutes from the Federal Reserve’s June meeting, out Wednesday at 2 p.m. Eastern Time., will be another important report for investors.