U.S. stocks struggled for direction Monday as investors monitored efforts to resolve a U.S. debt-ceiling standoff ahead of a potential default, and weighed economic data that showed a sharp fall in New York state factory activity.
The S&P 500 fell 0.3% last week, while the Dow dropped 1.1%. The S&P 500’s decline was cushioned by megacap tech-related stocks, which also helped lift the Nasdaq Composite out of a bear market. The Nasdaq gained 0.4% last week.
In One Chart: The S&P 500 is top-heavy with tech. Here’s what that says about future stock-market returns.
What’s driving markets
Despite a generally well-received earnings season and signs that easing inflation may allow the Federal Reserve to halt its monetary-tightening cycle, stocks have been unable to break out of their recent range, as first banking-sector anxiety and lately worries about a technical government-debt default have restrained bulls.
“Over the short-term, the stock market is stuck until we reach a debt-ceiling resolution and until we see more clarity from the regional banking sector, which are the two factors weighing on stocks right now,” said Brad Bernstein, managing director at UBS Wealth Management in Philadelphia, in a note. “Markets are anxious for a debt-ceiling solution and the markets are also hoping that the Fed pauses its rate hikes at the June meeting.”
See: Why the stock market will struggle to rally until debt ceiling, bank woes are in rearview mirror
A second round of debt-ceiling talks between the White House and congressional leaders appears set for Tuesday, according to President Joe Biden.
“I remain optimistic because I’m a congenital optimist,” Biden told reporters Sunday in Rehoboth Beach, Del. “But I really think there’s a desire on their part as well as ours to reach an agreement. I think we’ll be able to do it.”
House Speaker Kevin McCarthy, R-Calif., on Monday, however, said the White House and congressional Republicans remained far apart.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, warned against complacency, noting that previous debt-ceiling deadlines have required significant market volatility to encourage politicians to reach agreement.
“[W]e’ve continued to remind investors that since 2011, getting Congress to strike a deal has seemed to occur only after the stock market has thrown a temper tantrum,” said Calvasina in a note to clients.
“In years where the drama in equity markets has otherwise been modest, the hits generally end up in the 5-6% area. In years in which debt ceiling drama has occurred in the context of other major problems in the market (i.e., 2011, 2015-2016, 2018), the hits have ranged from 10% to 19%,” she added.
Read: Here’s where investors may turn to ‘hide’ as U.S. debt-ceiling deadline looms based on 2011 market reaction
The New York Fed’s Empire State business-conditions index, a gauge of manufacturing activity in the state, plunged 42.6 points in May to negative 31.8, the regional Fed bank said Monday. Economists had expected a reading of negative 5, according to a survey by The Wall Street Journal. Any reading below zero indicates deteriorating conditions.
The data underlined stagflation worries, said Edward Moya, a senior market analyst at Oanda, in a note.
“It seems that after every economic reading, Wall Street has more reminders on how hard it will probably be to get inflation anywhere close to the Fed’s target. A recession seems like the only way pricing pressures will get closer to 3%,” Moya said.
Atlanta Federal Reserve Bank President Raphael Bostic on Monday said that he would like to see the central bank pause its cycle of rate hikes to gauge the health of the economy.
“I think the appropriate policy is really to just wait and see how much the economy slows from the policy actions that we’ve done,” Bostic said in an interview on CNBC.
Check out: Paul Tudor Jones says stocks likely to finish 2023 higher because Fed is done hiking rates
Companies in focus
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Shares of Newmont Corp.
NEM,
+2.42%
rose 1.2% after the company agreed to buy Australian gold and copper producer Newcrest Mining Ltd.
NCM,
+1.52%
for $17.5 billion.
-
Oneok Inc.
OKE,
-8.30%
shares fell 7.7% after the company agreed to buy Magellan Midstream Partners LP
MMP,
+14.00%
for $18.8 billion in cash and stock, which is a 22% premium to Friday’s close.
-
3M Co.
MMM,
+0.02%
said Monday it has fired Michael Vale, group president and chief business and country officer, for cause. The dismissal is due to “inappropriate personal conduct and violation of company policy, unrelated to the company’s operations and financial performance,” the company said in a brief statement. Shares of the diversified industrial company and Dow component were down 0.4%.
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— Jamie Chisholm contributed to this article.
