S&P 500, Dow end lower for 3rd day Thursday, Nasdaq on pace for worst month since Oct 2008

U.S. stocks gave back sharp early gains to end lower Thursday, as investors weighted Federal Reserve Chairman Jerome Powell’s plans for several interest-rate hikes this year and tighter financial conditions.

What happened in markets?
  • The Dow Jones Industrial Average
    closed down 7.31 points, or less than 0.1%, at 34,160.78, after rising more than 600 points at its session high in early activity.

  • The S&P 500
    fell 23.42 points, or 0.5%, ending at 4,326.51.

  • The Nasdaq Composite
    dropped 189.34 points, or 1.4%, to finish at 13,352.78, on pace for its longest weekly losing streak since Nov. 2012.

On Wednesday, stocks gave up gains during Powell’s news conference to end mostly lower, with the Dow falling 0.4% and the S&P 500 shedding 0.2%, while the Nasdaq Composite eked out a tiny gain.

What’s drove markets

A strong day for stocks ended with all three indexes in the red, landing the S&P 500 barely above its 4,316.905 correction territory, or a fall of at least 10% from its last record close. The Russell 2000
was less lucky, entering its first bear market since March 9, 2020, according to Dow Jones data.

That pullback has the Dow, S&P 500 and Russell 2000 on pace for their worst months since March 2020, while the Nasdaq was sliding closer to its worst month since October 2008, according to the data.

“Today’s stock market rally did not last as corporate America reminded us that supply chain troubles persist, and profit forecasts are not providing any reasons to be optimistic,” Edward Moya, OANDA’s senior market analyst, wrote in a note.

But there was some good macro data to start the day.

The U.S. economy sped up toward the end of 2021 before omicron’s surge, growing at an annual rate of 6.9% in the fourth quarter as consumers spent more and businesses stocked back up. Economists polled by The Wall Street Journal had forecast gross domestic product to rise by 5.5% in the fourth quarter after a slower 2.3% annualized pace in the third quarter.

While strong economic data could fuel expectations that the Fed will be more aggressive in tightening policy, economists noted that inventory gains were a key driver, without which the economy would have expanded at just a 1.9% pace.

“The silver lining in today’s report is that the supply side of the economy is starting to catch up to demand, as evidenced by the large inventory build in Q4,” wrote economists Aneta Markowska and Thomas Simons at Jefferies. “Although inventory levels are still low, they have clearly inflected, which should begin to take pressure off inflation fairly soon.”

Investors also continued to wrestle with the outlook for interest rates and other aspects of monetary policy after the Fed concluded its first policy meeting of the year on Wednesday. While the statement from the Federal Open Market Committee didn’t surprise investors, the tone of Powell’s comments in his subsequent news conference did.

“Many traders are still processing what happened yesterday with the Fed and the reality is that they missed an opportunity,” Moya wrote in his Thursday note.

The central bank chief didn’t reject the notion that the Fed could hike at each of its meetings this year, and talked of the need to be “nimble.” He also said there was “quite a bit of room to raise rates without hurting jobs.”

Seema Shah, chief strategist at Principal Global Investors, called that remark about the ability to lift rates without hurting the jobs market a “real kick to market teeth.”

Fed-funds futures on Thursday showed the chances of the Federal Reserve delivering five 25-basis-point rate hikes by year-end had risen to nearly 33% from 22% Tuesday, according to the CME FedWatch Tool.

Powell also refused to rule out the prospect of half a percentage point, rather than quarter-point, increases in rates over the course of the hiking cycle.

The yield on the 2-year Treasury
surged 10.1 basis points Thursday to 1.190%, its biggest daily yield climb since March 10, 2020, according to Dow Jones Market Data.

Read: These 11 arguments will define ‘titanic battle’ between stock market bulls and bears as Fed lifts rates

Powell’s comment that his core PCE inflation forecast had increased by about 20 basis points since December equates to a roughly 30 basis point increase in projected fed-funds rate, said Lawrence Dyer, head of U.S. rates strategy at HSBC.

He said fed-funds futures for the end of 2022 are up a bit more than that, which could mean that the yields could reverse in the next few days.

In other U.S. data, orders for durable goods fell a larger-than-expected 0.9% in December, while initial claims for U.S. unemployment benefits fell by 30,000 last week to 260,000, signaling that disruptions in the labor market tied to omicron are starting to fade.

Pending home sales dropped 3.8% in December, according to the monthly index released by the National Association of Realtors.

Investors were also reacting to a deluge of earnings, while Apple Inc.
was due to deliver results after the closing bell.

Companies in focus
  • Electric car maker Tesla Inc. TSLA late Wednesday delivered a report that showed a stronger profit than forecast but cautious guidance on the supply-chain snags in microchips. Shares fell 11.6%.

  • Shares of McDonald’s Corp.
    were down 0.4% after the fast-food giant reported fourth-quarter earnings and revenue that missed expectations. 

  • Microchip equipment maker Lam Research Corp.
    said supply-chain conditions worsened in late December. Shares dropped 6.9%.

  • Zero-commission app Robinhood Markets Inc.
    is set to report earnings after Thursday’s closing bell ,one day before the anniversary of its decision to halt trading on meme stocks, shares were down 6.5%.

How other assets performed
  • The yield on the 10-year Treasury note
    fell 3.8 basis points to 1.807% as of 3 p.m. Eastern. Yields and debt prices move opposite each other.

  • The ICE U.S. Dollar Index
    a measure of the currency against a basket of six major rivals, jumped 1.3%, trading at its highest since July 2020.

  • Oil futures
    fell by 74 cents, or nearly 0.9%, to settle at $86.61 a barrel on the New York Mercantile Exchange, after closing at more-than-seven-year highs on Wednesday. Gold futures
    fell 2%, to settle at $1,793.10 an ounce below the $1,800 an ounce threshold.

  • In European equities, the Stoxx Europe 600
    rose 0.6%, while London’s FTSE 100
    gained 1.1%.

  • The Shanghai Composite
    fell 1.8%, while the Hang Seng Index
    was down 2% and Japan’s Nikkei 225
    dropped 3.1%.

Steven Goldstein contributed reporting.