The Dow Jones Industrial Average absorbed its third consecutive loss on Wednesday amid a broad but ultimately mild selloff sparked by continued worries over a bubble in financial assets.
The European Central Bank’s Financial Stability Report today declared that “some market segments continue to show signs of elevated valuations and may be at risk of a correction,” echoing similar sentiment from the U.S.’s Federal Reserve.
Several analysts also posited that investors were unnerved by a nasty spill in digital currencies, with major players Bitcoin and Ethereum hemorrhaging as much as 32% to 45%, respectively, before recovering much of those losses. Bitcoin closed off 9.8% to $3,9146.44, while Ethereum finished down 22.2% to $2,638.73. (Cryptocurrencies trade 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
Benjamin Tsai, president and managing partner of registered investment advisor Wave Financial, cited a laundry list of reasons for the plunge, from Tesla CEO Elon Musk’s sudden 180 on Bitcoin because of energy consumption concerns, to China’s move to ban financial institutions from accepting crypto payments, to $8.5 billion in automated selling.
“Also, given the size of this selloff, some market participants could have made it worse due to their inexperience in managing risk,” he says. “The retail and corporate class that just entered after the start of 2021 … are more likely to de-risk and also sell into the market, creating a small cascading effect.”
Within cryptocurrencies, however, this kind of volatility is far from rare.
“Bitcoin has gone through more than 20 20% drops since it was created in 2010,” says Lule Demmissie, President of Ally Invest. “It can be risky to invest in an up-and-coming space, and it’s hard to say where Bitcoin should be trading now without any cash flows or financial data to base the valuation on.”
Stocks dropped sharply early on but regained some ground in the afternoon. The Dow finished off its lows declining 0.5% to 33,896. Relative strength in tech helped the Nasdaq Composite finish with a marginal decline to 13,299.
“The selloff also reflects growing investor unease about inflation and whether it would warrant the Fed to act to rein it in earlier than expected,” says Anu Gaggar, senior global investment analyst for Commonwealth Financial Network, a registered investment adviser and independent broker/dealer. “While a lot of red on the screen may make investors uncomfortable, such market actions are quite normal for a well-functioning market and not cause for much concern or an indication of a more sustained underlying trend just yet.
Other action in the stock market today:
- The S&P 500 retreated 0.3% to 4,115.
- The small-cap Russell 2000 dipped 0.8% to 2,193.
- Advanced Micro Devices (AMD, +2.4%) stock was in the minority today, spending most of the afternoon in positive territory and closing higher after the chipmaker said its board of directors approved a $4 billion share repurchase program.
- Target (TGT, +6.1%) was another name that ended comfortably in the green. Shares of the retailer got a boost after TGT reported a 23% surge in sales to $24.2 billion in its first quarter, handily beating expectations. Earnings of $3.69 per share also came in well above the consensus estimate.
- Home improvement retailers remained in focus today, after Lowe’s (LOW, -1.1%) released higher-than-anticipated first-quarter earnings this morning – following in the footsteps of Home Depot (HD, -0.7%) which reported its impressive quarterly results yesterday. “HD and LOW both delivered strong earnings this week, reflecting the strength in the home improvement space as well as the meteoric rise in lumber prices,” says David Keller, chief market strategist at StockCharts.com. “Consumers are clearly investing in their homes, and the strength in HD and LOW has mirrored the strength in homebuilders and related names.” And while both stocks fell in the wake of upbeat earnings, this is likely “due to inflation concerns and broader selling in the equity markets,” Keller adds.
- U.S. crude oil futures slumped 3.3% to settle at $63.36 per barrel, after data from the Energy Information Administration showed domestic crude inventories unexpectedly rose last week.
- Gold futures nabbed a fifth straight win in today’s risk-off session, rising 0.7% to end at $1,881.50 an ounce.
- The CBOE Volatility Index (VIX) finished 3.9% higher to 22.18.
If You Want to Take a Stab at Growth …
The market appears to be increasingly risk-averse at the moment. For most investors, that simply means hunkering down in core positions and avoiding aggressive bets.
But tactical investors might consider raising a little cash in anticipation of taking some swings should better prices present themselves in the coming months.
What kind of swings?
Traditionally, small-cap stocks are a natural fit given their high-risk, high-reward profiles; growth plays such as these seven picks, for instance, could be a bumpy ride in the short term, but analysts have strong conviction that they’ll pan out over the longer term.
The same goes for companies positioned to leverage mega-trends, such as these solar stocks; the industry has cooled off after a red-hot run in 2020’s back half, making them more appealing for those seeking growth over a longer time horizon.
And there’s always the true “Wall Street casino”: biotech stocks.
OK, OK. The industry has both swelled in size and matured over the years, and many biotechnology plays are now respectable blue chips with diverse product lineups. But the truth remains that many biotech stocks can generate massive swings around events such as trial data releases and FDA rulings.
The summertime is peppered with several such potential catalysts, so we’ve compiled a list of important dates for investors to watch if they plan to chase the biotech dragon.
Kyle Woodley was long AMD as of this writing.
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