Markets ended in the red for the second consecutive day following Fed Chair Janet Yellen’s comments that stock valuations are “quite high”. Yellen warned investors of potential dangers they may face due to high equity valuations. Meanwhile, weak private sector hiring numbers added to the bearish sentiment. The soft numbers came in ahead of the much awaited non-farm payrolls report slated for release on Friday.
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The Dow Jones Industrial Average (DJI) declined 0.5% to close at 17,841.98. The Standard & Poor’s 500 (S&P 500) also decreased 0.5% to 2,080.15. The tech-laden Nasdaq Composite Index closed at 4,919.64; declining 0.4%. The fear-gauge CBOE Volatility Index (VIX) climbed 5.9% to settle at 15.15. A total of about 3.7 billion shares were traded on the NYSE on Wednesday. Decliners outpaced advancing stocks on the NYSE. For 66% stocks that declined, 32% advanced.
Federal Reserve Chairwoman Janet Yellen warned investors of high equity valuation risks in a low interest rate environment. Yellen said: “I would highlight that equity market valuations at this point generally are quite high’. She added: “They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there”. She said the Fed is also aware that there may be a sharp rise in long-term rates, once the central bank starts hiking federal funds rates.
However, she mentioned risks to financial stability “are moderated, not elevated, at this point.” She also said: “We’re not seeing any broad based pickup in leverage, we’re not seeing rapid credit growth, we’re not seeing an increase in maturity transformation,” which leads to bubbles in financial markets.
Investors were jittery following Yellen’s remarks on valuations in the equity market. Yellen was speaking at a panel discussion where Christine Lagarde, managing director of the International Monetary Fund was also present.
Meanwhile, soft private sector jobs report did little to boost investor sentiment. A total of 169,000 private jobs were added in April, reported Automatic Data Processing, Inc. (ADP – Analyst Report). This was less than the 175,000 job additions in March, which was revised lower by 14,000. April’s job additions were the smallest since Jan 2014. The numbers were short of market expectations too, as economists were eyeing an addition of 205,000 jobs.
Private sector hiring came in weaker than expected due to less job additions by large employers and in goods producing sectors including small and medium-sized employers. Energy sector was also a laggard as it shed jobs at a rapid pace.
Investors are now focused on initial claims numbers on Thursday and crucial total non-farm payroll numbers scheduled for release on Friday. Total non-farm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States.
Separately, nonfarm business sector labor productivity declined 1.9% in the first quarter of 2015. The decrease was more than the consensus expectation of a drop by 1.8%.
Among earnings news, Herbalife Ltd. (HLF – Snapshot Report) reported first quarter earnings per share of $1.29, beating the Zacks Consensus Estimate by 29%. Chesapeake Energy Corporation (CHK – Analyst Report) also posted first quarter earnings per share of 11 cents that came ahead of the Zacks Consensus Estimate of 2 cents. The Wendy’s Company ( (WEN – Analyst Report) too reported first quarter earnings per share of 6 cents that beat the Zacks Consensus Estimate of 5 cents. While, shares of Chesapeake Energy declined 7.2%, shares of Herbalife and Wendy’s gained 16.5% and 7.2%, respectively.
Yesterday’s losses were broad based with 8 out of 10 sectors of the S&P 500 ending in the red. The Technology SPDR ETF (XLK) declined 0.9%, the highest among the S&P 500 sectors. Key technology stocks including Apple Inc. (AAPL – Analyst Report), Microsoft Corporation (MSFT – Analyst Report), AT&T Inc. (T – Analyst Report), Google Inc (GOOGL – Analyst Report) and International Business Machines Corporation ( (IBM – Analyst Report) decreased 0.6%, 2.8%, 1%, 1.5% and 1%, respectively.
The Utilities Select Sector SPDR (XLU) dropped almost 0.6% and was the second biggest loser among the S&P 500 sectors. Key utilities stocks including Dominion Resources, Inc. (D – Snapshot Report), NextEra Energy Inc (NEE – Analyst Report), Exelon Corporation (EXC – Analyst Report), Southern Company (SO) and PG&E Corporation (PCG) decreased 0.2%, 0.1%, 1.7%, 0.4% and 0.8%, respectively.
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