Dow comes off session low, still down for third straight day as investors digest mixed signals on economy

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U.S. stocks slumped for a third straight session Thursday as investors weighed mixed signals on the strength of the economy and digested another round of corporate earnings reports for more signs of the pace and scope of future Federal Reserve interest rate increases.

How stocks are trading

  • The Dow Jones Industrial Average fell 158 points, or 0.5%, to 33,134.
  • The S&P 500 fell 23 points, or 0.6%, to 3,905.
  • The Nasdaq Composite shed 95 points, or 0.9%, to trade at 10,861.

On Wednesday, the Dow fell more than 600 points, or 1.8%, while the S&P 500 shed 1.6% and the Nasdaq Composite declined 1.2%. The S&P 500’s decline was its biggest since Dec. 15, chopping its gain for the year to just 2.3%.

What’s driving markets

Stocks extended their slide on Thursday with the Dow Jones Industrial Average slumping for three consecutive sessions this week, with investors keying in on further signs of a weakening U.S. economy.

Good news for the economy also appeared to be bad news for stocks this week. First-time claims for unemployment benefits unexpectedly fell by 15,000 to 190,000 in the seven days ending Jan 14., the lowest reading since September. Construction on new U.S. homes fell a seasonally adjusted 1.4% in December to 1.38 million, the Commerce Department said Thursday. 

“This morning’s data illustrates that the increasingly darkening cloud of weakening economic data has a silver lining—a persistently strong labor market,” said José Torres, senior economist at Interactive Brokers.

Torres thinks unemployment claims show that it’s a job seekers’ labor market despite high-profile tech layoffs. Employers are still hesitant to lay off workers due to a tight labor market, low labor participation and the nation having 1.8 job openings for every unemployed individual, he said.

Data on Wednesday showed December retail sales dropped 1.1%, contracting for the second month in a row. Meanwhile, industrial production slumped 0.7% in December in the biggest monthly decline since September 2021.

“What just some weeks ago would have seen markets cheering the weaker data as it would have suggested correctly that the Fed’s aggressive rate hike campaign is doing its job in tamping down the demand side of the economy, is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike,” said Quincy Krosby, chief global strategist for LPL Financial, in a note.

See: Fed’s Brainard: Interest rate policy will have to be restrictive ‘for some time’ even with recent moderation of inflation

Federal Reserve Vice Chairman Lael Brainard said on Thursday that interest rate policy will have to be restrictive “for some time” even with the recent moderation of inflation. Susan Collins, the president of the Boston Fed, also reiterated the need for the central bank to raise the policy rates further to get inflation on a steady downward path.

“I anticipate the need for further rate increases, likely to be just above 5%, and then holding rates at that level for some time,” Collins said in a speech to a conference on the future of the New England economy sponsored by her regional bank. Rates could rise “perhaps at a slower pace,” Collins said.

Other Fed officials set to speak Thursday include Vice Chair Lael Brainard and New York Fed President John Williams.

St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester both reiterated on Wednesday that they thought interest rates needed to go higher still to ensure inflation falls back to the central bank’s 2% target, though Dallas Fed President Lorie Logan said the Fed should slow down the pace of its interest-rate hikes until more data shows where the economy is headed.

See: U.S. runs up against its debt limit, so Treasury starts using ‘extraordinary measures’: Here’s what that means

Treasury Secretary Janet Yellen confirmed to top U.S. lawmakers in a letter that her department began to use “extraordinary measures” on Thursday due to the federal government hitting its ceiling for borrowing. She had indicated last week that such a move was coming.

Of particular concern to equity bulls is that the S&P 500 index failed to break decisively above the 4,000 level and has been rebuffed again by its 200-day moving average, meaning the bear market downtrend remains intact.

A mixed fourth-quarter earnings reporting season to date has also constrained bullish impulses.

Over the past few weeks, earnings expectations for the first quarter and the second quarter of 2023 switched from year-over-year growth to year-over-year declines, said John Butters, senior earnings analyst at FactSet, in a Wednesday update.

Expectations for both quarters have been falling over the past few months, he added.

On June 30, the estimated earnings growth rate for Q1 2023 was 9.6%, and the estimated earnings growth rate for Q2 2023 was 10.3%, he said. By Sept. 30, the estimated earnings growth rate for Q1 2023 was 6.3%, and the estimated earnings growth rate for Q2 2023 was 5.1%. As of Wednesday, the estimated earnings decline for Q1 2023 is -0.6%, and the estimated earnings decline for Q2 2023 is -0.7%, FactSet data show.

Companies in focus

—Jamie Chisholm contributed to this article.

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