Stocks continue to fall, adding to biggest retreat of the year

Wall Street is opening lower as worries build that the U.S. may be headed for a painful recession. 

The S&P 500 fell 37 points, or nearly 1%, to 3,891 as of 11:40 a.m. EST Thursday. The Dow dropped 252 points, or 0.8%, to 33,044 and the tech-heavy Nasdaq was down 1.3%. 

Reports showed weakness in several areas of the economy, including the housing industry and manufacturing in the mid-Atlantic region, though they weren’t quite as bad as expected and the job market appears to remain healthy. They follow worse-than-expected readings a day earlier on retail sales, a cornerstone of the economy, and industrial production. Altogether, they show an economy slowing under the weight of last year’s blizzard of rate hikes by the Federal Reserve. 

While acknowledging investors’ retreat as a valid response to the latest economic data, analysts remain fairly optimistic.

“The tenor of the market swung dramatically toward the negative end of the sentiment spectrum on Wed[nesday], and it remains there so far this morning,” analyst Adam Crisafulli of Vital Knowledge said in a research note. “Investors were crowding into the ‘soft landing’ narrative up until Tues[day], but things changed in the last 24 hours thanks to bad growth data, mounting layoffs, disinflation figures that didn’t sway Fed officials.”

Added Crisafulli, “We think the landing will be more soft than hard, and the YTD rally hasn’t concluded.” 


2022 ended with lower inflation, but Fed could still raise interest rates

06:18

Higher Fed hikes likely

The U.S. government reported Wednesday that Americans cut back on their retail spending more than anticipated in December, the second consecutive monthly decline. Separately, the Federal Reserve said U.S. industrial production, which covers manufacturing, mining and utilities, fell in December much more than economists had expected.

On the other hand, wholesale prices — goods bought and sold before they reach the consumer — fell for the sixth consecutive month, though those prices rose 6.2% in December from a year earlier.

Investors have been hoping that easing inflation and a slowdown in economic growth might influence the Federal Reserve’s position on interest rates. The central bank aggressively raised rates throughout 2022 in an effort to cool hot inflation.But a key Federal Reserve policymaker said interest rates need to go higher than the central bank signaled earlier.

“On the macro front, there remain lingering uncertainties about the outlook for the global economy,” said Anderson Alves, trader at ActivTrades. “A slew of disappointing U.S. data releases and hawkish Fed rhetoric are also adding to the risk-off mood across markets.”

Talk of mild recession

The broader economic picture is still not clear enough to see whether the Fed will succeed in avoiding a recession. Several major banks have forecast at least a mild recession at some point in 2023 and many companies have been reporting lower profit margins as consumers pull back on their spending. 

While the overall number of people seeking unemployment benefits in the U.S. reached a four-month low last week — a sign that employers are holding on to their workers despite the Federal Reserve’s efforts to slow the economy and tamp down inflation — layoffs in the tech industry continue. 

On Wednesday, Microsoft said it is cutting 10,000 workers over the next eight months. The company said the cuts, some of which begin immediately, represent under 5% of its employee base.

“We are in a period of maximum uncertainty for the economy, and the stock market, because a deep drop in the economy would justify an additional, deeper dive in stocks,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in reaction to jobless claims data. “On the other hand, if the economy remains at full employment, consumer spending holds up reasonably well and the parts of the economy that didn’t over-hire, continue to operate as normal, then stocks could go higher,” he said.

In energy trading Thursday, U.S. benchmark crude fell 51 cents to $78.97 a barrel. It fell 70 cents to $79.48 per barrel on Wednesday. Brent crude, the international pricing standard, lost 37 cents to $84.61 a barrel.

In currency trading, the U.S. dollar declined to 128.45 Japanese yen from 128.87 yen. The euro cost $1.0819, up from $1.0796.

The S&P 500 fell 1.6% on Wednesday, while the Dow industrials lost 1.8%. The Nasdaq composite slid 1.2%, ending a seven-day winning streak. The losses are a reversal for the market, which kicked off the year with a two-week rally.

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