Stocks Slip from New Highs: Understanding the Dow’s Sudden Decline

In Wednesday’s session, Nvidia Corp. could not counteract the negative stock-market sentiment stemming from the minutes of the May policy meeting of the Federal Reserve.

Despite Nvidia’s strong performance in the quarter, the stock markets were unable to rebound on Thursday. Although Nvidia’s stocks soared to over $1,000, both the S&P 500 and Nasdaq Composite saw declines for the day.

The DJIA hit 40,000 for the first time last week but fell by 605.78 points on Thursday to close at 39,065.26. This was the biggest percentage drop since March 22, 2023, and the largest point decline since Feb. 21, 2023, according to Dow Jones Market Data.

Keith Lerner, who is the chief market strategist at Truist Advisory Services, likened the response to Nvidia’s eagerly awaited report to the market fluctuations typically observed when important economic data, such as employment or CPI figures, is made public.

Experts in technical analysis mentioned that the decrease in stock prices that occurred recently, while not appealing, was not completely unexpected due to the market reaching new highs in May after a fall in April.

Mark Arbeter, the president of Arbeter Investments and a technical analyst, noted that there was widespread involvement of individual stocks in the market rebound from April 19 to May 15. However, he observed a decrease in this participation in the past six days.

He noticed that during the past week, only the technology sector saw growth in value, while other sectors like real estate, energy, financials, discretionary, utilities, and staples all saw declines ranging from 1.3% to 2.7%. The mid- and small-cap indexes had peaked six days ago and were now dropping quickly. Also, indicators of sentiment suggested that optimism was rising to levels that often signal caution for investors.

Arbeter informed MarketWatch that after a large rise in the major stock indices, followed by a slight new high, the chart pattern could lead to adverse outcomes.

What about the fundamentals? Investors who were already anxious because of the Federal Reserve meeting minutes may have been further worried by the increase in the purchasing managers index, which signaled higher activity in the services sector. The minutes revealed that policymakers were not inclined to decrease interest rates, and in certain cases were even considering raising them if necessary.

After economic data was released, Lerner observed that the 10-year Treasury yield rose from a previous low, resulting in downward pressure on sectors like small caps and real estate that are influenced by interest rate fluctuations.

He elaborated that our attention is now on the Federal Reserve’s direction. In addition, with the market being relatively calm before Memorial Day, any changes in the market may have a greater impact.

Rather than Nvidia’s strong performance influencing the market, it may have been more focused on simply getting the earnings report from the top chip company out of the way.

He explained that those who have been betting against the market or holding a negative outlook can now breathe a sigh of relief, as Nvidia’s dominance is no longer a concern. Nobody was willing to go against Nvidia.

Some individuals also noted the importance of the approaching extended weekend. Bond markets will have early closures on Friday, and all U.S. markets will be shut on Monday in observance of Memorial Day.

In an email, Jamie Cox, a managing partner at Harris Financial Group, mentioned that markets tend to slow down before a long holiday weekend. The release of the Fed minutes caused this slowing down, and not even news from Nvidia could redirect focus to the positive aspects of the market.

At the same time, it was not practical to expect Nvidia to save the market, despite high expectations due to its position as the top-performing stock globally, due to deteriorating market conditions.

Arbeter humorously mentioned that having a group of five to seven very large stocks could potentially lift the market, but he is skeptical that a single stock alone could have the same impact.