By Thornton McEnery and William Watts
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 /zigman2/quotes/210598065/realtime DJIA +1.34% 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 /zigman2/quotes/210599714/realtime SPX +2.02% fell 23.42 points, or 0.5%, ending at 4,326.51.
The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +2.76% 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 /zigman2/quotes/210598147/delayed RUT +3.19% 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.”