Closing Market Update

Chip Dip Hits Nasdaq Amid Geopolitical Jitters

July 17, 2024 Joe Mazzola
Geopolitical worries following Trump's comments and Biden's possible policy changes hit semiconductor stocks, sending the Nasdaq down 2.5% even as yields reached four-month lows.

Published as of: July 17, 2024, 4:40 p.m. ET 

Audio Close Schwab Market Update

Listen to the latest audio Schwab Market Update. Or listen and subscribe for free to the end-of-day Schwab Market Update podcast in your podcast app of choice.

(Wednesday market close) Geopolitical anxiety ahead of the U.S. election accelerated the sell-off in semiconductor shares and across info tech Wednesday, sending the Nasdaq Composite ($COMP) down more than 2% and spiking volatility. 

An old market adage suggests that when both volatility and major indexes climb together, one or the other is likely to bend. Yesterday, the Cboe Volatility Index® (VIX) reached its highest level since early June and stocks climbed to record highs. Stocks lost the staring contest today and volatility kept rising. The VIX closed above 14 for the first time since late May, still historically low.

The strong rally over the last week sent major indexes into overbought technical territory that appeared to set things up for profit-taking, especially in the tech sector. This morning's geopolitical hiccups related to comments from Republican nominee Donald Trump and a possible Biden administration policy move apparently gave sellers the fundamental excuse they needed, resulting in what CNBC jokingly called a "chip-wreck."

Today's drop in the $COMP wasn't all that devastating in context. The market last visited these levels just two weeks ago, and the $COMP remains up 20% year to date. It's now down only 3% from all-time highs posted last week. Pullbacks like this are historically common in rallies and may give investors a chance to take pause and remind themselves that stocks go two directions: up or down.

Another thing to keep in mind: Six of the 11 S&P 500 sectors finished in the green today despite the index falling more than 1%. Mega caps fell across the board, and their lofty market capitalizations weighed on the market cap-weighted index. However, the S&P 500 Equal Weight Index (SPXEW), which weighs all stocks equally, fell just 0.2%. Also, the Dow Jones Industrial Average® ($DJI) actually gained a bit more ground as traditional industrial heavyweights attracted more buyers.

Here's where the major benchmarks ended:

  • The S&P 500® index (SPX) fell 78.93 points (–1.39%) to 5,588.27; the Dow Jones Industrial Average added 243.6 points (0.59%) to 41,198.08; the Nasdaq Composite plunged 512.41 points (–2.77%) to 17,996.92.
  • The 10-year Treasury note yield (TNX) dropped just below 4.15%.
  • The Cboe Volatility Index jumped sharply to 14.48.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.

Stocks on the move

Semiconductor stocks took the brunt of the midweek blow, hurt by concerns of possible industry impact if the Biden administration goes through with the most severe trade restrictions available, known as the foreign direct product rule. This lets the United States impose controls on foreign-made products that use even the tiniest amount of American products if companies, including ASML (ASML), continue to give China access to advanced semiconductor technology. Bloomberg reported this is something the administration has discussed with allies. ASML is a European firm that makes equipment for chip building and has a major market in China.

Not to be outdone in tough talk regarding semiconductors, former President Trump wants to consider making Taiwan pay for its own defense against China because of its world-leading position in chip manufacturing, which Taiwan has achieved over the past decades despite the threat of China trying to "reunify" the island off its coast. 

While some recent Wall Street rotation toward small caps and big U.S. industrial manufacturing companies and away from chips reflects rate-cut hopes, it also hinges in part on ideas that a second Trump administration could put policies into place that might favor domestic manufacturing. That's something the Biden administration has also emphasized; for example, providing incentives to chip manufacturers for "reshoring" their production. Many of those traditional behemoths piled on additional gains today as that trade continued.

A strong Treasury market linked to healthy demand in a 20-year Treasury bond auction this afternoon sent the benchmark 10-year Treasury note yield to a close below 4.15% for the first time in more than four months, possibly helping sectors like staples, utilities, and real estate. Staples and utilities, sectors known for dividends, often compete with Treasuries for buyers. Energy and financials also gained in a move that could be linked to lower rates that might re-ignite the economy. However, the hot Russell 2000® (RUT) index of small caps took a cool dip, falling 0.8% after climbing more than 10% in the last week.

Financials and health care, notably biotech, are among the recent small-cap leaders. Biotech is a very rate-sensitive sector because mergers and acquisitions—arguably its bread and butter—tend to tick up when borrowing costs decline. Even with Wednesday's losses factored in, the Nasdaq Biotech Index (NBI) is up 8% from its July lows. Many biotech stocks live in the small-cap world and are often seen as potential targets for big pharma.

The following companies had stock price moves driven by analyst ratings, quarterly earnings, or other news:

  • United Airlines (UAL) descended nearly 4% after reporting its earnings data despite beating analysts' earnings per share estimate and meeting revenue expectations. It also reaffirmed previous fiscal 2024 guidance. Shares reacted to a 2.4% drop in quarterly total revenue per available seat mile (TRASM), a key component of airline profitability, and to the company's lower-than-expected EPS guidance for the current quarter.
  • Johnson & Johnson (JNJ) climbed nearly 4% after the pharma firm exceeded analysts' earnings estimates thanks to strong sales of cancer and psoriasis drugs and reiterated previous annual sales guidance. Other health firms like Pfizer (PFE), Amgen (AMGN), and Merck (MRK) also advanced following the strong J&J results.
  • Conagra (CAG), PepsiCo (PEP), and Procter & Gamble (PG) all turned in strong performances as investors gravitated toward more defensive sectors like staples during the tech sell-off.
  • Qualcomm (QCOM) dropped nearly 8% following a downgrade from HSBC (HSBC) to hold from buy.
  • The PHLX Semiconductor Index (SOX) descended nearly 6% and is down about 8% from its all-time high posted last week as shares of Advanced Micro Devices (AMD), Taiwan Semiconductor (TSM), Broadcom (AVGO), Nvidia (NVDA), and Micron (MU) all fell 5% or more in a sell-off triggered by geopolitical concerns. The worst performer among semiconductor-related firms was ASML (ASML), which fell more than 12%.
  • Intel (INTC) bucked the lower trend in chipmakers, possibly because it might benefit if there's trouble ahead for those who make chips abroad. Intel has emphasized its domestic production capabilities. Shares rose 0.3%.

Earnings highlights this week include Taiwan Semiconductor later tonight in the United States, Netflix (NFLX) tomorrow afternoon, and American Express (AXP) on Friday. TSM reported strong June sales last week, but its earnings now come into focus thanks in part to what Trump said about Taiwan. The company has shifted some manufacturing to the United States.

Netflix is up sharply this year and recently received price target increases from several analysts. They cited strong content offerings, Barron's noted in a recent article, as well as price increases from competitors that could give Netflix more flexibility to raise its prices. The second season of "Squid Game" and the broadcast of two NFL football games on Christmas Day could be catalysts for future growth, according to analysts.

The Olympics, Taylor Swift, and the ECB

The European Central Bank (ECB) wraps up its July meeting tomorrow morning, and it's widely expected to keep rates unchanged after lowering them last month. 

"Interest rate futures markets are pricing in just 4% odds of a second cut in a row in July but a confident 82% chance of a cut in September," said Jeffrey Kleintop, chief global investment strategist at Schwab. "Tomorrow's press conference may not commit to a cut in September. Policymakers still want to see how the Euro's football championship in June and July, the Olympics in July and August, and Taylor Swift's Eras tour in July and August will add to services prices over the summer."

Back home earlier today, June housing starts and building permits both topped analysts' expectations at a seasonally adjusted annual rate of 1.353 million and 1.446 million, respectively. Consensus for starts was a seasonally adjusted annual rate of 1.31 million, according to Briefing.com. Permits were seen at 1.391 million. Homebuilder stocks have been on a tear the last week on hopes that falling interest rates might mean lower mortgages and get more people wanting to buy new homes.

Industrial production for June also arrived this morning, climbing 0.6%. Analysts had expected a 0.3% gain, down from May's 0.9% increase, Briefing.com said. The report could indicate more economic resilience, though the trend here has been choppy over the last year from month to month. Manufacturing output, a closely watched segment of the report, climbed 0.4% in June, down from a 1% rise in May but still healthy. Mining rose 0.3%. 

Tomorrow morning features June leading indicators, which analysts expect will continue a downward trend, and weekly initial and continuing jobless claims. Initial claims are expected to come in at 225,000, up from 222,000 the prior week, Briefing.com reported. Continuing claims are seen at 1.855 million, not far from recent highs.

The day ended with investors pricing in a less than 5% chance of a Fed rate cut at the July meeting but 100% for at least a 25-basis-point cut by the September meeting of the Federal Open Market Committee (FOMC), according to the CME FedWatch tool.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc.

Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk, including loss of principal.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. For more information on indexes, please see ​schwab.com/indexdefinitions.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

0724-0131