Nasdaq Composite ekes out gain

The Dow and S&P 500 extended losses to a fourth day in a row Tuesday, marking the worst stretch for the S&P 500 since mid-May, after worries about China’s indebted property company Evergrande were blamed for Monday’s global equity rout.

• The Dow Jones Industrial Average DJIA, 1.58% fell 50.63 points, or 0.2%, to end at 33,919.84.
• The S&P 500 SPX, 1.27% slipped 3.54 points, or 0.1%, to close at 4,354.19.
• The Nasdaq Composite COMP, 0.85% rose 32.49 points, or 0.2%, to finish at 14,746.40.

On Monday, the Dow fell 614 points, or 1.8%, to 33970, the S&P 500 declined 75 points, or 1.7%, and the Nasdaq Composite dropped 330 points, or 2.2%.

What drove markets?

Stocks finished mixed Tuesday, with investors testing the market’s low from the day before when concerns over the heavy debt burden of property giant China Evergrande Group 3333, +17.62% sparked a selloff.

The worries over Evergrande came at a critical juncture, with several firms having warned, correctly, that September would be bumpy for U.S. equities after a long rally to record highs during the summer.

“It’s not surprising that September brings a little volatility to the market,” Jay Pestrichelli, chief executive officer of ZEGA Financial, said in a phone interview Tuesday. He viewed the “noise” around Evergrande as a buying opportunity. “We put money to work yesterday,” he said. “We like the S&P 500.”

ZEGA had confidence to add exposure to the S&P 500 index partly because of hedging strategies that it has in place to limit losses, according to Pestrichelli. “It gives you the opportunity to be a little greedy when others are fearful,” he said.

While worries over an expected default by property developer Evergrande set the tone for weakness, the market “was just looking for a reason to pull back,” Liz Young, head of investment strategy at SoFi, told MarketWatch in a phone interview.

Stocks, as measured by major indexes, have rallied in 2021, with the S&P 500 yet to suffer a 5% pullback. Concerns about the impact of a possible Evergrande default, as well as expectations the Federal Reserve will move to begin reducing its monetary support as the U.S. economy recovers from the pandemic, and signs of peak economic and corporate earnings growth have all been cited by market watchers as factors that could contribute to at least a near-term pullback.

Young said the market is likely to see heightened volatility through the remainder of September and well into October, which would give investors holding cash the opportunity to add to market exposure through dollar-cost averaging. Over the long run, she remains constructive on cyclicals, including industrials, materials, financials and consumer discretionary.

As far as Evergrande is concerned, the selloff appeared to be “primarily driven by technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks,” said Marko Kolanovic, chief global markets strategist at JPMorgan Chase. Kolanovic anticipates a recovery as the delta wave of coronavirus fades, and expects companies to beat expectations on third-quarter earnings.

Wall Street analysts were at pains to say that Evergrande isn’t China’s Lehman moment.

The Federal Reserve on Tuesday kicked off a two-day meeting that could lead to a more hawkish interest-rate forecast, while Congress has not so far increased the federal debt ceiling as it struggles to agree on a package of infrastructure spending.

The Fed has been prepping the market for a tapering of its asset purchases, according to Pestrichelli. “That just means that they’re less dovish than before, which is different from raising rates,” he said. Accelerating its timeline for rate hikes to combat inflation would “put some pressure on the market, for sure,” he said.

Even after Monday’s fireworks and losses in nine of the last 11 sessions, the S&P 500 was only 4% below its record high.

“Tapering is largely priced into markets right now,” said Jon Adams, senior investment strategist at BMO Global Asset Management, in a phone interview Tuesday. “The economy no longer needs the exceptional support the Fed has provided over the last couple of years.”

U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.62 million in August, a 3.9% increase from the previous month, the U.S. Census Bureau reported Tuesday. Compared with August 2020, housing starts were up 17.4%. The pace of permitting for new housing units also increased in August, up 6% from July and 13.5% from a year ago.

“Both housing starts and permits surprised to the upside,” said Adams. “Housing market strength may continue a bit longer than expected.”

Which companies were in focus?

• Shares of Uber Technologies Inc. UBER rallied 11.5%, after the ride-sharing company updated its third-quarter outlook following its first months of profitability in adjusted Ebitda (earnings before interest, taxes, depreciation and amortization) in July and August.
• Shares of Bill.com Holdings Inc. BILL dropped 3.4%, after the provider of software aimed at simplifying back-office operations announced the offering of $1 billion of common stock to the public and $500 million in convertible debt to qualified institutional investors.
• Transfix Inc., a digital freight platform, said Tuesday it is going public by merging with special-purpose acquisition corporation G Squared Ascend GSQD, +1.55% in a deal with a pro forma enterprise value of $1.1 billion.
• Shares of Activision Blizzard Inc. ATVI fell 4.1% after the company said it was continuing to address and resolve workplace complaints as it cooperates with a Securities and Exchange Commission investigation into disclosures on employment matters.

How were other assets trading?

• The yield on the 10-year Treasury note TMUBMUSD10Y rose 1.5 basis points to 1.323%, increasing for four of the past five trading days. Yields and debt prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six rivals, dipped 0.1%.
• Oil futures ended higher, with the U.S. benchmark CL00 rising 0.4% to settle at $70.56 a barrel. Gold futures GC00 also rose, settling 0.8% higher at $1,778.20 an ounce.
• In Asia, Hong Kong’s Hang Seng HSI, +1.19% managed a 0.5% advance after Monday’s 3.3% rout, while the Nikkei 225 NIK, -0.67% slumped 2.2% in Tokyo after a holiday. Chinese markets remain closed until Wednesday.
• Markets in Europe saw gains, with the Stoxx Europe 600 SXXP, 0.94% rising 1% and London’s FTSE 100 UKX, -0.02% climbing 1.1%.