S&P 500 posts worst 4-day drop since May as market struggles to recover from Evergrande rout

• The Dow Jones Industrial Average DJIA,
  + 0.10%
  lost 50.63 points, or 0.2%, to end at 33,919.84.

• The S&P 500 SPX,
  + 0.15%
  slipped 3.54 points, or 0.1%, to close at 4,354.19.

• The Nasdaq Composite COMP,
  -0.03%
  rose 32.49 points, or 0.2%, to end at 14,746.40.

On Monday, the Dow Jones lost 614 points, or 1.8%, to 33,970, the S&P 500 lost 75 points, or 1.7%, and the Nasdaq Composite lost 330 points, or 2.2%.

What drove the markets?

Shares ended mixed on Tuesday, with investors testing the previous day’s bottom when concerns over the heavy debt burden of real estate giant China Evergrande Group 3333,
-11.61%
sparked a massive sale.

Concerns over Evergrande came at a critical juncture, with several companies correctly warning that September would be bumpy for US stocks after a long rally to record highs over the summer.

“It’s no surprise that September brings a bit of volatility to the market,” Jay Pestrichelli, CEO of ZEGA Financial, said in a telephone interview on Tuesday. He saw the “noise” around Evergrande as a buying opportunity. “We put money to work yesterday,” he said. “We love the S&P 500.”

ZEGA was confident to add exposure to the S&P 500 Index in part because of the hedging strategies it put in place to limit losses, according to Pestrichelli. “It gives you the opportunity to be a little greedy when others are scared,” he said.

As concerns over an expected default from property developer Evergrande set the tone for weakness, the market “was just looking for a reason to pull out,” Liz Young, head of investment strategy at SoFi, told MarketWatch in a telephone interview.

Stocks, as measured by major indexes, rallied in 2021 as the S&P 500 has yet to fall 5%. Concerns about the impact of a possible Evergrande default, as well as the Federal Reserve’s expectations to begin reducing monetary support as the US economy recovers from the pandemic, and signs of spiking growth Economic and corporate earnings have all been cited by market watchers as factors that could contribute to at least a short-term pullback.

Young said the market is expected to experience increased volatility through September and through October, which would give cash-holding investors the opportunity to increase their exposure to the market through average dollar costs. Over the long term, it remains positive on cyclicals, particularly industrials, materials, financials and consumer discretionary.

As far as Evergrande is concerned, the sell appears to be “primarily driven by technical sell flows (CTAs and option hedges) in an environment of low liquidity and an overreaction of discretionary traders to perceived risks,” said Marko Kolanovic, Chief Global Markets Strategist. at JPMorgan Chase. Kolanovic predicts a recovery as the coronavirus delta wave wears off and expects companies to beat expectations for third quarter earnings.

Wall Street analysts have had a hard time saying Evergrande is not China’s Lehman moment.

Read: Will Evergrande be China’s “Lehman Moment”? Wall Street says no

The Federal Reserve kicked off a two-day meeting on Tuesday that could lead to more hawkish interest rate forecasts, while Congress has yet to raise the federal debt ceiling as it struggles to get down to it. agreement on a package of infrastructure spending.

The Fed has prepared the market for a decrease in asset purchases, according to Pestrichelli. “It just means they’re less accommodating than before, which is different from the rate hike,” he said. Speeding up his rate hike schedule to fight inflation “would definitely put some pressure on the market,” he said.

Even after Monday’s fireworks display and losses of nine of the past 11 sessions, the S&P 500 was only 4% below its all-time high.

“A lot of the reduction is built into the markets right now,” Jon Adams, senior investment strategist at BMO Global Asset Management, said in a telephone interview Tuesday. “The economy no longer needs the exceptional support the Fed has provided over the past two years.”

U.S. homebuilders began building homes at a seasonally adjusted annual rate of 1.62 million in August, a 3.9% increase from the previous month, the US Census Bureau reported on Tuesday. Compared with August 2020, housing starts are up 17.4%. The pace of issuing permits for new housing units also increased in August, up 6% from July and 13.5% from a year ago.

“Housing starts and permits both surprised on the upside,” Adams said. “The strength of the housing market could continue a little longer than expected. “

Which companies were the center of attention?

• Actions of Uber Technologies Inc. UBER rose 11.5%, after the rideshare company updated its outlook for the third quarter after its first months of profitability in Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in July and August.

• Actions of Bill.com Holdings Inc. BILL fell 3.4%, after the software provider aimed at simplifying back office operations announced the offering of $ 1 billion of common stock to the public and $ 500 million of convertible debt to qualified institutional investors.

• Transfix Inc., a digital freight platform, said on Tuesday it was going public by merging with a special purpose acquisition company G Square Ascension GSQD, + 1.55% in a deal with a pro forma enterprise value of $ 1.1 billion.

• Actions of Activision Blizzard Inc. ATVI fell 4.1% after the company said it continues to process and resolve workplace complaints as it cooperates with a Securities and Exchange Commission investigation into disclosures relating to issues of ‘use.

How did other assets trade?

• The yield on the 10-year TMUBMUSD10Y T-bill rose 1.5 basis points to 1.323%, rising for four of the last five trading days. The yields and prices of debt move in opposite directions.

• The ICE US Dollar Index DXY, a measure of the currency against a basket of six rivals, fell 0.1%.

• Oil futures ended higher, with the US benchmark CL00 rising 0.4% to $ 70.56 per barrel. GC00 gold futures also rose, rising 0.8% to $ 1,778.20 an ounce.

• In Asia, Hang Seng HSI from Hong Kong,
  -1.30%
  managed a 0.5% lead after Monday’s 3.3% rout, while the Nikkei 225 NIK,
  + 2.06%
  fell 2.2% in Tokyo after a holiday. Chinese markets remain closed until Wednesday.

• European markets are growing with the Stoxx Europe 600 SXXP,
  -0.90%
  up 1% and London’s FTSE 100 UKX,
  -0.38%
  up 1.1%.

—Steve Goldstein contributed to this report