November 30, 2023

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Stocks Plunge as Recession Fears, Federal Reserve Dash Investor Hopes

The U.S. stock market suffered one of its worst days of 2022 as the leading benchmark indexes fell sharply on Dec. 15, dashing hopes for a year-end Santa Claus rally.

Investors engaged in a broad-based selloff toward the end of the trading week. The Dow Jones Industrial Average (DJIA) ended 764 points lower on Dec. 15. The tech-heavy Nasdaq Composite Index plunged by 3.2 percent, while the S&P 500 Index lost nearly 2.5 percent.

Year to date, the Nasdaq has lost nearly 32 percent, the S&P 500 has tumbled by more than 18 percent, and the DJIA has slumped by 9.2 percent.

Some of the biggest names on the New York Stock Exchange endured steep losses. Shares of Alphabet, Amazon, and Apple lost more than 4 percent. Meta shed close to 6 percent, while Netflix plummeted by 8.6 percent. Bank shares also slumped, with Bank of America and JPMorgan Chase declining by nearly 2 percent.

Some of the stocks to trade higher were Verizon Communications (0.9 percent), Allstate Corp. (1.8 percent), Coterra Energy (2.6 percent), and D.R. Horton (3.5 percent).

Traders sought shelter in traditional safe-haven assets. The benchmark 10-year yield shed roughly 6 basis points to about 3.44 percent. The U.S. Dollar Index, which gauges the greenback against a basket of currencies, surged above 104.

Recession Concerns Drive Selloff

Weak economic data spooked markets.

According to the Census Bureau, retail sales tumbled by 0.6 percent month-over-month in November. That’s down from the 1.3 percent increase in October and worse than the market projection of a 0.1 percent drop. It represented the largest slide this year, led by declines in sales for furniture (negative 2.6 percent), building materials (negative 2.5 percent), motor vehicles (negative 2.3 percent), and electronics (negative 1.5 percent).

Manufacturing numbers also added to widespread recession concerns. Last month, industrial and manufacturing production slid by 0.2 percent and 0.6 percent, respectively. The New York Empire State Manufacturing Index weakened to negative 11.2, while the Philadelphia Fed Manufacturing Index came in at a worse-than-expected negative 13.8.

Labor numbers were mixed as initial jobless claims tumbled to 211,000 for the week that ended on Dec. 10, Department of Labor numbers show (pdf). But continuing jobless claims edged up to 1.671 million.

The latest statistics prompted the Federal Reserve Bank of Atlanta to trim its fourth quarter GDPNow model to 2.8 percent, down from the previous estimate of 3.2 percent.

S&P Global will also release its composite, manufacturing, and services Purchasing Managers’ Index (PMI) readings for December on Dec. 16. The PMI prints, which show the general direction of economic sectors, are expected to remain in contraction territory.

Fed Fuels Freefall?

Fed Chair Jerome Powell’s remarks following the rate hike decision on Dec. 14 jolted the market in a way that echoed the final days of 2018.

In late 2018, Powell turned hawkish and weighed the possibility of raising interest rates. This prevented a rally in the days leading up to Christmas, according to Nancy Tengler, CEO of Laffer Tengler Investments.

“Let’s not forget that Jay Powell wrecked a Santa Claus rally in 2018 when he got very hawkish and talked rates up and then the market basically went into a bear market until Christmas Eve,” she wrote in a note. “So, I think you want to remain vigilant and focused on the long term. I’m expecting a rally, and I’m hoping for a rally, but we don’t know for sure when we will get it.”

Did history repeat itself? Financial markets were spooked by Powell’s comments during his post-Federal Open Market Committee meeting press conference. He reaffirmed to reporters that the central bank will continue boosting interest rates throughout 2023, with the benchmark federal funds rate expected to peak at a higher-than-expected 5.1 percent.

The Fed raised interest rates by 50 basis points on Dec. 14, bringing the target rate to a range of 4.25 to 4.5 percent, the highest level in 15 years.

Despite the better-than-expected November CPI data of 7.1 percent, Powell noted that he wants to see a persistent downward trend in inflation before easing its tightening cycle.

“So, we may have to raise rates higher to get to where we want to go,” he said. “And that’s really why we’re rounding down. We’re expecting that they’ll have to remain high for a time.”

Jerome Powell
Federal Reserve Chair Jerome Powell speaks during a press conference in Washington on Nov. 2, 2022. (Elizabeth Frantz/Reuters)

Ultimately, the Fed will wait for more data to be convinced that inflation is steadily declining.

“Never forget the unspoken rule of central banks: do whatever it takes to avoid embarrassment,” said Christian Hoffman, portfolio manager and managing director at Thornburg Investment Management.

Powell also conceded that it’s “not going to feel like a boom” in the U.S. economy, but rather “it’s going to feel like very slow growth.”

The Survey of Economic Projections (SEP) shows that the gross domestic product growth rate will be sluggish over the next three years: 0.5 percent (2023), 1.6 percent (2024), and 1.8 percent (2025). The median unemployment rate is forecast to run at 4.6 percent (2023), 4.6 percent (2024), and 4.5 percent (2025). The Fed is expected to reach its 2 percent target rate in 2024.

Because economic conditions are holding steady, Hoffman thinks the market isn’t completely dismissing the possibility of a soft landing.

“This was the last big known unknown on the 2022 calendar. Investors broadly are closing the books on 2022 and looking to 2023,” he wrote in a note.

In the end, the biggest risk facing the financial markets is the central bank going too far, Tengler noted.

“The bond market seems to think the Fed should be wrapping up here,” she said. “You are starting to hear CEOs and strategists blame the Fed. [Economist Mohamed] El Erian: one of the biggest policy mistakes in history. Because Powell’s Fed has made many mistakes, has lagged the markets, and flip-flopped, this is a reasonable worry.”

Next year, as higher interest rates work their way through the system, investors might focus more on the real economy and determine if the United States is bracing for tepid growth, a short and shallow recession, or a deep economic downturn.

Andrew Moran

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of “The War on Cash.”