The Dow Jones Industrial Average (DJIA) experienced a decline on Wednesday, with investors keeping a close watch on the federal debt ceiling debate in Washington. As the final trading day of May comes to a close, market participants await the outcome of the debt ceiling deal reached between President Joe Biden and House Speaker Kevin McCarthy. This agreement, intended to cap federal baseline spending for two years and raise the debt ceiling, has not yet been ratified, leaving the market on edge.
The S&P 500 and Nasdaq Composite also experienced dips, with the tech-heavy Nasdaq outperforming due to excitement surrounding artificial intelligence stocks such as Nvidia. However, concerns about the market’s narrow strength persist, as some experts argue that broad participation is lacking.
In this article, we will discuss the current state of the Dow Jones, the debt ceiling deal, and the factors affecting the market.
Also read: Asian Stock Market Today: Gains Fueled by Fed Rate Hike Speculations and US Debt Ceiling Resolution.
Dow Jones Performance
The Dow Jones traded 228 points lower, or 0.7%, on Wednesday. The S&P 500 dipped 0.6%, while the Nasdaq Composite pulled back by 0.3%. With just Wednesday’s session left in the trading month, the Nasdaq Composite is up more than 6%. The S&P 500, however, is up only about 0.4%, while the Dow has fallen around 3.6%.
The outperformance of the Nasdaq can be attributed largely to the enthusiasm around artificial intelligence, which briefly pushed Nvidia’s market cap above $1 trillion on Tuesday. However, many on Wall Street are worried that the market’s strength has been too narrow.
“We’re not seeing any signs of broad participation. We’re not seeing signs of early cyclicals on top of A.I.,” said Andrew Smith, chief investment strategist at Delos Capital Advisors in Dallas.
The Debt Ceiling Deal
The debt ceiling deal announced over the weekend cleared a major test on Tuesday night after advancing to the House floor following a 7-6 vote in the House Rules Committee. The floor vote is expected to take place around 8:30 p.m. ET Wednesday.
“I think we have the votes to pass this today,” said Rep. Patrick McHenry, a GOP negotiator on the debt deal, on CNBC’s “Squawk Box” Wednesday morning.
With the debt ceiling deal in place, the market awaits the vote’s approval, which could significantly impact the Dow Jones, S&P 500, and Nasdaq Composite.
Market Reaction to Debt Ceiling Deal
Major market averages opened mixed on Tuesday after party leadership worked out an agreement over the debt ceiling. Early on, the Nasdaq Composite gained 0.6%, the S&P 500 picked up 0.2%, and the Dow fell 0.2%. Deutsche Bank’s Jim Reid said there’s not much room for error “but with moderates on both sides seemingly in line, then there can be a vocal minority on both sides against the deal and it still passes.”
The 10-year Treasury yield fell 10 basis points to 3.71%. The 2-year yield fell 8 basis points to 4.50%. ING fixed income strategists suggested that the removal of the tail risk of default – even if the chance was tiny to begin with – will “allow markets to focus on the more important debate” of whether the Fed is done with its hiking cycle. “We expect the run-up to the vote to see Treasury Yields gradually climb higher if more lawmakers come out in favor of the deal,” they added.
Economic Factors Affecting the Market
On the economic front, the S&P Case Shiller home price index for March arrived at -1.1% compared to the -1.6% year-over-year economists predicted figure. The Conference Board’s measure of May consumer confidence fell to 102.3 versus the 100.0 consensus read and 103.7 prior level. The Dallas Fed Manufacturing Index arrived at -29.1 compared to the estimated -25 figure.
“The US Conference Board consumer sentiment data is as subject to partisan bias as is its University of Michigan rival,” UBS’ Paul Donovan said. “The Dallas Fed manufacturing activity survey is always a delight–not because of the data but because of the comments section. Anyone using sentiment data should read the Dallas Fed comments, as a reminder of who bothers to fill in surveys.”
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Active Stocks in the Market
Among active stocks, Nvidia continued to rise and is set to join the $1T market-cap club. The stock market rally closed mixed on Tuesday, with leading stocks such as Nvidia coming off highs while some new breakouts fizzled.
The Nasdaq initially powered higher, as Nvidia and other AI stocks kept running Tuesday morning, as did Tesla. The composite gave up all its gains by midafternoon before closing modestly higher. The rest of the market was lackluster throughout the session, with the S&P 500 flat and the Dow Jones slightly lower.
Not many stocks were actionable on Tuesday, and some of those quickly flopped, including Life Time Group and ON Semiconductor. Others looked extended, such as PC and printer giant HP Inc., Hewlett Packard Enterprise, Ambarella, and Box, which all reported Tuesday night. Box stock rose modestly, while HPQ, HPE, and especially AMBA stock fell on results or guidance.
Salesforce.com looms Wednesday night along with cybersecurity plays Okta and CrowdStrike. Meanwhile, white-hot artificial-intelligence play C3.ai may offer a heat check for AI stocks, including AI stock.
Market Rally Analysis
The stock market rally remains divided with narrow leadership. The Nasdaq started strong, rising as much as 1.4% and almost clearing its August peak. But the composite erased all of that before closing modestly higher. The Nasdaq 100 also pared gains, as Nvidia, Tesla stock, and others came off highs. It’s now 9% above its 50-day line after topping 10% at one point intraday Tuesday.
The S&P 500, which hit a fresh nine-month high intraday, ended flat. The Dow Jones drifted toward its 200-day, but traded in a narrow range. The Russell 2000 continues to test its 50-day after last week’s reversal from the 200-day.
The First Trust Nasdaq 100 Equal Weighted Index ETF initially broke out to a 52-week high but reversed for a fractional loss. The Invesco S&P 500 Equal Weight ETF dipped 0.2% and is still stuck below moving averages. Decliners modestly outpaced advancers.
AI stocks generally advanced on Tuesday, though a few reversed lower and many like Nvidia came well off early highs. C3.ai was a notable exception.
A few names cleared official buy points on Tuesday morning, with mixed results. Life Time and Onsemi stock broke out, but soon reversed lower.
On the plus side, Arista Networks entered a buy zone but is 13% above the 50-day line after surging 23.5% over three sessions. FLNC stock triggered an early entry and finished just below an official buy point, but it is 24% above the 50-day line.
What To Do Now
A split market rally is not a great situation, and there were few reasons or even opportunities to add exposure on Tuesday. Not many stocks are working, and most of those winners are extended, such as Nvidia. A decent number of stocks are near buy points, though some are extended from moving averages.
In recent weeks, many promising stocks have staged fakeout-or-shakeout breakouts, such as LTH stock on Tuesday. That makes it hard to make headway or to build up positions.
At some point buying opportunities will work more consistently, as the market rally shows broader breadth and leadership. But that probably won’t be immediately obvious. So investors should be cautious about new buys and quick to cut losses.
If you do own some red-hot artificial-intelligence plays such as Nvidia or AI stock, enjoy the ride. They could keep running, but significant pullbacks would not be a surprise in the coming days. NVDA stock, which briefly had a $1 trillion valuation on Tuesday, is 103% above its 200-day line. C3.ai is 148% above that long-term level.
You might wait for a big, heavy downside reversal before starting to exit or paring holdings. Obviously, the size of your AI-related exposure, your conviction in the theme and individual stocks, as well as your own investing style, will factor greatly in your decisions.
Keep working on your watchlists, and read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.
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