Stock Market Update

[BRIEFING.COM] The major indices shifted lower today, unable to build on yesterday's gains as geopolitical worries took over as a primary driver. Specifically, the day started on a cautious-minded note following the news that President Trump left the G-7 Summit abruptly to get back to Washington to attend to an evolving Israel-Iran conflict.

The president said in a Truth Social post that everyone should evacuate Tehran immediately. That set the tone for a soft start, along with the report that retail sales and industrial production were both weaker than expected in May. Selling efforts picked up in the afternoon, however, when the president took to Truth Social again to say that we (the U.S.) know where Iran's Supreme Leader is, that he is an easy target, but that we are not going to take him out (kill!) -- at least not for now. He added that "our patience is wearing thin."

These remarks were made as speculation swirled that the U.S. could possibly get involved in the conflict by dropping "bunker bombs" built by the U.S. and flown by the U.S. to destroy Iran's nuclear enrichment facilities that lie deep underground.

The president's comments quickly led to de-risking behavior that took the S&P 500 back below 6,000 and triggered additional safe-haven buying interest in Treasuries and the dollar. The 2-yr note yield settled the day down two basis points at 3.95%, while the 10-yr note yield dropped seven basis points to 4.39%. The U.S. Dollar Index was up 0.8% to 98.76.

Every S&P 500 sector was down today, with the exception of energy (+1.0%). It deviated from the pack, following WTI crude futures higher (73.27, +1.44, +2.0%), which did an about-face from Monday.

Health care (-1.6%) was the biggest sector laggard amid reports discussing the possibility of stricter disclosure rules and tighter regulations over pharmaceutical advertising and a Senate Finance Committee proposal for larger cuts to Medicaid spending than what was proposed by the House. Eli Lilly (LLY 791.27, -16.31, -2.02%) was caught up in the sector's weakness as it also announced an approximately $1.0-1.3 billion cash acquisition of Verve Therapeutics (VERV 11.38, +5.11, +81.50%).

There was some added attention on the underperformance of the consumer discretionary sector (-1.6%). Many components traded lower in a knee-jerk response to the retail sales report; however, the sector's homebuilding components were down on industry news that included an earnings miss and disappointing outlook from Lennar (LEN 104.61, -4.88, -4.46%) and a dour NAHB Housing Market Index for June, which dropped to 32 (Briefing.com consensus 36) from 34 in May.

Breadth figures reflected today's more risk-averse tone, as did the 12.7% increase in the CBOE Volatility Index to 21.54. Decliners led advancers by a better than 2-to-1 margin at the NYSE and Nasdaq.

• S&P 500: +1.7% YTD
• Nasdaq: +1.1% YTD
• DJIA: -0.8% YTD
• S&P 400: -3.4% YTD
• Russell 2000: -5.7% YTD

Reviewing today's economic data: 

• Retail sales declined 0.9% month-over-month in May (Briefing.com consensus -0.6%) following a downwardly revised 0.1% decline (from 0.1%) in April. Excluding autos, retail sales fell 0.3% month-over-month (Briefing.com consensus 0.1%) following a downwardly revised unchanged reading (from 0.1%) in April.
  • This was not a good report in terms of hard economic data. It reflected a more cautious-minded consumer, who, in general, pulled back spending on goods. Clothing and accessories store sales (+0.8%) were a surprising outlier, but otherwise, there was a retrenchment in spending in many discretionary categories, including electronics and appliance store sales (-0.6%) and food services and drinking places (-0.9%). This report will help support arguments that the Fed should be cutting rates soon.
• Industrial production fell 0.2% month-over-month in May (Briefing.com consensus 0.1%) following an upwardly revised 0.1% increase (from 0.0%) in April. The capacity utilization rate was 77.4% (Briefing.com consensus 77.7), down from an unrevised 77.7% in April. Total industrial production increased 0.6% yr/yr while the capacity utilization rate was 2.2 percentage points below its long-run average.
  • The key takeaway from the report is that manufacturing output was little changed in May despite the announcement in early April that the reciprocal tariffs would be paused. The tepid activity is consistent with slower economic growth in its own right and likely also reflects the planning uncertainty that goes hand-in-hand with the tariff uncertainty.
• Import prices were unchanged in May after increasing 0.1% in April, while import prices, excluding oil, increased 0.3% after increasing 0.4% in April. Export prices fell 0.9% after increasing 0.1% in April, while export prices, excluding agriculture, fell 1.0% after rising 0.1% in April.
• The NAHB Housing Market Index fell to 32 in June (Briefing.com consensus 36) from 34 in May.
• Business Inventories were unchanged in April (Briefing.com consensus 0.0%) after rising a revised 0.1% (from 0.0%) in March.