U.S. stocks slump as investors digest mixed signals on economy

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U.S. stocks slumped Thursday as investors weighed mixed signals on the strength of the economy, digested another round of corporate earnings reports and remained focused on the outlook for the pace and scope of future Federal Reserve interest rate hikes.

How stocks are trading

  • The Dow Jones Industrial Average was down 182 points, or 0.6%, at 33,115.
  • The S&P 500 fell 22 points, or 0.6%, to 3,905.
  • The Nasdaq Composite shed 76 points, or 0.7%, to trade at 10,881.

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

Sentiment was hit Wednesday by further signs of a weakening U.S. economy after data showed retail sales fell more than expected, industrial production slumped, and Microsoft confirmed it would shed 10,000 jobs.

Sovereign bond yields fell in response — pressured further by data showing lower wholesale prices — but their inverse relationship to stocks appears to be dislocated for now, analysts noted.

“Although Treasurys were rallying, the risk-off tone meant that U.S. equities were much less resilient…as recession concerns mounted,” said Henry Allen, strategist at Deutsche Bank.

“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.

On Thursday, good news for the economy also appeared to be bad news for stocks after first-time claims for unemployment benefits unexpectedly fell by 15,000 to 190,000, 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. 

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.

Fed speakers for Thursday include Boston Fed President Susan Collins, Fed Vice Chair Lael Brainard and New York Fed President John Williams.

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 said.

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

  • Procter & Gamble Co. shares fell 1.1% after the consumer goods giant reported fiscal second-quarter profit that matched expectations, but volume that fell more than some analysts had forecast.
  • Alcoa Corp. shares were down 2.2% after the aluminum maker reported a second consecutive quarterly loss, saying it has tried to lessen the impact throughout the year of high costs for raw materials and energy and lower prices for its alumina and aluminum.
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