List of Stock Losers Sends a Troubling Signal to Economy Bulls

(Bloomberg) -- Stocks are tumbling anew. Is this another dip worth buying? For those tempted, consider how persistent weakness has become in corners of the market that have traditionally spoken to economic vigor.

From small caps to chipmakers and transports, companies seen as growth proxies each fell more than 1.5% Thursday to lead the retreat. Worryingly to chart analysts, they’ve failed to confirm the S&P 500’s high this year. Semiconductor firms are on course for their worst monthly slump since 2008.

Sure, these bellwethers have struggled before and never was it a death knell to the 10-year bull market. Still, the concerted woes could be sending a signal perhaps worth heeding at a time when a trade war with China worsens, bond yields keep falling and corporate profits are stuck.

“The catch here is determining how investors in general are gaming the trade tensions,” said Jeff deGraaf, co-founder of Renaissance Macro Research. “If they’re viewed as temporary, then risks exist of a protracted war. If they’re discounted as escalation grows, then we’re closer to a low. Our sense is that the market as a whole is in the first camp (it will blow over), but specific sectors (semis) are preparing for nuclear winter.”

Stocks fell Thursday as the world’s two largest economies hardened their trade-war stances, bringing the S&P 500’s loss in three weeks to 4.2%. With the index poised for its first monthly decline of the year, strategists such as Tom Lee of Fundstrat have urged investors to buy the dip, saying equity losses from trade concerns are unlikely to go beyond 5%.

Indeed, the S&P 500’s retreat at its worst point this month has been 4.5% as overnight losses were pared in regular trading and some of the year’s worst days followed by bounces.

But underneath the resilience is a deterioration in the momentum of some of the most cyclical stocks. Trailing the market for a third month in a row, the Russell 2000 of smaller firms has fallen to the lowest level since 2016 relative to the S&P 500.

Small-caps rely on revenue at home more than their larger counterparts and when they struggle it can elicit skepticism in the domestic economy. The Russell 2000’s relative peak in June foreshadowed the recession scare in late 2018 that fueled the worst retreat during this bull market.

Meanwhile, weakness in transports is often seen as ominous by analysts since they form the infrastructure on which commerce is conducted and provide clues about the strength of the economy. So are semiconductors, which are sometimes thought of as analogous to railroads for the electronic age.

Right now, both are boding ill for the market. Down 3.1%, the Dow Jones Transportation Average is on course for a third straight weekly loss. The Philadelphia Semiconductor Index has tumbled 15% this month as Trump administration’s threats to ban U.S. companies from selling products to Huawei Technologies Co. reeled the industry.

“It’s still risk off mode,” said Craig Johnson, chief market technician at Piper Jaffray & Co. ‘It means the broad market is probably going to have a corrective pullback further.” He expects the S&P 500 to give up at least half of its gains made from December to April, should the index fail to hold above 2,800. That would represent a decline to 2,650.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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