U.S. stocks slip after fall in ISM service sector gauge

What are major benchmarks doing?

• The Dow Jones Industrial Average
  DJIA,
  -0.88%
  dropped 394.3 points, or 1.1%, to 34,392.03.

• The S&P 500
  SPX,
  -0.54%
  declined 35.15 points, or 0.8%, to 4,317.19.

• The Nasdaq Composite
  COMP,
  -0.20%
  edged down 78.23 points, or less than 0.1%, to 14,561.10.

U.S. markets were closed Monday in observance of Independence Day, which fell on Sunday. On Friday, the S&P 500 closed at its seventh consecutive record — its longest such streak since 1997 — and the Nasdaq Composite and Dow also finished at all-time highs.

What’s driving the market?

Stocks have slowly pushed further into record territory in recent weeks as investors focused on a strengthening economy as fears of inflation appeared to ease, though supply-chain bottlenecks are seen slowing down the recovery.

The Institute for Supply Management on Tuesday said its service sector purchasing managers index fell to 60.1% in June from a record 64% in May. A reading of more than 50% indicates an expansion in activity. The IHS Markit final June services PMI fell to 64.6, down from 70.4 in May.

“The drop in the ISM services index in June suggests that shortages and price increases are becoming an increasing drag on hiring and economic activity,” said Michael Pearce, senior U.S. economist at Capital Economics, in a note.

Equities should continue to benefit over the short-term from low interest rates and pent-up consumer demand after the pandemic kept people home for so long, said Brian Walsh Jr., a financial advisor at Wayne, Pennsylvania-based wealth manager Walsh & Nicholson Financial Group, in a phone interview Tuesday. Inflation is a top concern for Walsh, who said he noticed substantially higher prices at restaurants while visiting a “packed” Jersey Shore over the July 4 holiday weekend. 

“It was beyond pre-pandemic,” Walsh said of the crowds he observed. “It was flooded with people.”

Walsh & Nicholson Financial Group, which oversees about $1 billion of assets, likes high-quality stocks with strong cash flows that will be able handle rising inflation, according to Walsh. “We have a strong tilt toward high-quality, dividend-paying companies,” he said. Walsh added that he  is avoiding adding new money to growth stocks due to concern about high valuations and is favoring an equal-weighted approach to investing in stocks in the S&P 500 index to avoid a top-heavy exposure to technology. 

Walsh pointed to the Invesco S&P 500 Equal Weight ETF
RSP,
-1.17%
as an example of this strategy. The exchange-traded fund is up almost 18% this year based on trading Tuesday afternoon, according to FactSet. That compares with a year-to-date gain of about 15% for the S&P 500 index, whose largest sector exposure is information technology, FactSet data show.

Meanwhile, U.S. Treasury prices rallied, pushing down yields, with the rate on the benchmark 10-year Treasury note falling back below 1.40%. Falling yields can be a boon to technology and other growth stocks more sensitive to interest rates, while undercutting shares of banks that tend to benefit from higher long-term rates. Goldman Sachs
GS,
-1.41%
and JP Morgan
JPM,
-1.93%
both fell.

Still, analysts said the overall backdrop remains positive as the second half of the year gets under way.

“Sentiment towards risk remains positive as we enter the second half of the year after a positive end to Q2. The S&P 500 and other U.S. indices hit repeated new all-time highs, with investors happy to buy every dip in the markets,” said Fawad Razaqzada, analyst at ThinkMarkets, in a note.

Need to Know: Here’s what could turn a ‘breather’ for stocks into a bigger correction

Accelerating COVID-19 vaccinations around the world and central bank stimulus are seen contributing to strong economic growth, while fears that inflation will hit uncomfortably high levels have been kept at bay as the Federal Reserve and other central banks insist that increased price pressures are a temporary phenomenon resulting from supply-chain bottlenecks, he said.

Read: What to expect if ‘peak everything’ already has happened and markets feel the force of gravity again

Also see: Is the market pricing in ‘peak growth’? These charts suggest as much, says a leading strategist

Oil prices were back in focus, with crude benchmarks pulling back after hitting levels last seen in 2014. Chevron
CVX,
-2.01%
lead energy stocks lower.

Talks were called off Monday after the United Arab Emirates stuck to its call to increase the baseline used to determine its output level and objected to a plan to extend the framework for the existing program of supply cuts from April 2022 through the end of next year.

Which companies are in focus?

• Shares of popular meme stock AMC Entertainment Holdings Inc.
  AMC,
  -0.80%
  fell 0.5% after the movie theater chain said it would no longer ask for shareholder approval to sell more shares.

• Shares of Chinese ride-hailing app Didi Global Inc.
  DIDI,
  -20.77%
  dropped about 20% after the Cyberspace Administration of China prevented new users for signing on to DiDi’s ride-hailing app over security concerns.

• Full Truck Alliance 
  YMM,
  -16.46%
  shares skidded 17.5%, and Kanzhun Ltd.
  BZ,
  -17.41%
  shares lost 17.2%, as their apps also were restricted. Existing users of the apps are still allowed to use their services.

• Nextdoor Inc. is set to go public as the neighborhood network company announced Tuesday a merger agreement with special-purpose acquisition company Khosla Ventures Acquisition Co. II 
  KVSB,
  +5.95%
  in a deal that values the combined company at about $4.3 billion. KVSB shares rose more than 5%.

How are other markets trading?

• The yield on the 10-year Treasury note
  TMUBMUSD10Y,
  1.381%
  dropped 6.7 basis points to 1.370%. Yields and debt prices move in opposite directions.

• The ICE U.S. Dollar Index
  DXY,
  +0.41%,
  a measure of the currency against a basket of six major rivals, rose 0.5%.

• The U.S. oil benchmark
  CL00,
  -2.30%
  turned lower, down 2.7% at $73.13 a barrel on the New York Mercantile Exchange. Gold futures
  GC00,
  +0.62%
  rose 0.5% to $1,792.70 an ounce.

• European equities closed lower, with London’s FTSE 100
  UKX,
  -0.89%
  falling 0.9% and the Stoxx Europe 600 index
  SXXP,
  -0.52%
  declining 0.5%.

• In Asia, the Shanghai Composite
  SHCOMP,
  -0.11%
  edged down 0.1%, while Hong Kong’s Hang Seng Index
  HSI,
  -0.25%
  fell 0.3% and Japan’s Nikkei 225
  NIK,
  +0.16%
  rose 0.2%.