U.S. Stocks Poised for Weekly Decline

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08/11/2017 | 07:20 pm

By Corrie Driebusch and Justin Yang
-- Global stocks fall on further North Korea rhetoric

-- Wall Street recovers slightly in Friday morning trade

-- Haven assets rise

U.S. stocks were on track for their biggest weekly loss in months, shaken by disappointing earnings results and an escalation of threats between the U.S. and North Korea.

The rhetoric, which began late Tuesday and continued through Friday morning, cracked the calm that has cocooned the market for months, and threatened to trip up stocks' steady climb higher. On Thursday, the Dow Jones Industrial Average, which has been steadily hitting records, posted its biggest decline since May. The CBOE Volatility Index, known as Wall Street's "fear gauge," rose to its highest level of the year.

On Friday, markets recovered slightly, and investors dipped back into stocks and retreated from safe haven assets such as gold and U.S. government bonds.

"As a portfolio manager, you say, 'Do I think we'll get a war out of this?' " said Torsten Slok, chief international economist at Deutsche Bank, referring to the bluster between North Korea and President Donald Trump. "If the answer is 'yes,' then you better get defensive. If you think this is just rattling sabers, and it's just words, then you could view this as a buying opportunity."

On Friday, the president appeared to double down on his earlier threat to release "fire and fury" on North Korea, warning on his Twitter account that military solutions are in place and "locked and loaded."

The Dow industrials and S&P 500 rose 0.2% in recent trading, though the S&P 500 is set to end the week down 1.4%, its biggest loss since March.

Investors said the week's declines were as much a result of disappointing earnings as they were caused by the threats.

Large retailers Macy's and Kohl's tumbled on Thursday after they reported disappointing second-quarter results. On Friday, fellow retailer J.C. Penney dropped 16% after its second-quarter loss exceeded expectations.

In other corporate news, shares of Snapchat parent Snap fell 13% after it reported earnings late Thursday that missed analyst forecasts. Nvidia's shares shed more than 5% after the chip maker's revenue rose only 2% from the first quarter.

The escalated talk of violence between the two countries simply provided an excuse for a selloff many investors consider overdue, some investors and analysts said.

On average, the S&P 500 falls 5% or more every 10 weeks and the index falls 10% every 33 weeks, according to data analyzed by AllianceBernstein going back to 1928. It has been more than a year since the last 5% downdraft in stocks and more than 76 weeks since the stock market suffered a 10% loss.

"Given the great run we've had, seems like some sort of pullback wouldn't be surprising," said Michael Baele, managing director of investments at U.S. Bank Private Wealth Management.

The CBOE Volatility Index -- a measure of investors' expectations for swings in the S&P 500 over the next 30 days -- surged 44% Thursday, to 16.04 -- its highest level since U.S. Election Day. It slipped a bit Friday, but was still on track to end the week up more than 50%.

The selling in the U.S. extended to global markets Friday. The Stoxx Europe 600 fell 1%, while benchmarks in Hong Kong and South Korea -- which had been one of the best performers of 2017 -- closed down 2% and 1.7% respectively, Friday, putting the week's drop at 2.5% and 3.2%.

Korea's Samsung Electronics fell 2.8% Friday. China's Tencent Holdings, whose surge in 2017 was key to the Hang Seng's gains, fell 4.9% Friday.

Write to Corrie Driebusch at [email protected]

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