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Business

Dow falls nearly 500 points after strong data, bearish comments by David Tepper

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U.S. stocks traded lower on Thursday, erasing most of their gains from their biggest rally in three weeks after a round of upbeat economic data and a warning from hedge-fund titan David Tepper that he was “leaning short” against both stocks and bonds on expectations the Federal Reserve and other central banks will continue tightening into 2023.

Positive economic news can be a negative for stocks by underlining expectations that monetary policy makers will remain aggressive in their efforts to quash inflation.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -1.51%
    fell 472 points, or 1.4%, to 32,903.
  • The S&P 500
    SPX,
    -1.99%
    shed 71 points, or 1.8%, to 3,807.
  • The Nasdaq Composite
    COMP,
    -2.84%
    fell 272 points, or 2.5%, to 10,437.

A day earlier, all three major indexes recorded their best gain in three weeks as the Dow advanced 526.74 points.

What’s driving markets

Investors saw another raft of strong economic data Thursday morning, including a revised reading on third-quarter gross domestic product which showed the U.S. economy expanded more quickly than previously believed. Growth was revised up to 3.2%, up from 2.9% from the previous revision released last month.

See: Economy grew at 3.2% rate in third quarter thanks to strong consumer spending

The number of Americans who applied for unemployment benefits in the week before Christmas rose slightly to 216,000, but new filings remained low and signaled the labor market is still quite strong. Economists polled by The Wall Street Journal had forecast new claims would total 220,000 in the seven days ending Dec 17.

“Jobless claims ticking slightly up but coming in below expectations could be a sign that the Fed’s wish of a slowing labor market will have to wait until 2023. While weekly jobless claims aren’t the best indicator of the overall labor market, they have remained in a robust range these last two months suggesting the labor market remains strong and has withstood the Fed’s tightening, at least for the time being,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office, in emailed comments.

“While weekly jobless claims aren’t the best indicator of the overall labor market, they have remained in a robust range these last two months suggesting the labor market remains strong and has withstood the Fed’s tightening, at least for the time being,” he wrote. “It’s no surprise to see the market take a breather today after yesterday’s rally as investors parse through earnings data, and despite some beats this week, expectations that earnings will remain as resilient in 2023 may be overblown.”

Stocks were feeling pressure after Appaloosa Management’s Tepper shared a cautious outlook for markets based on the expectation that central bankers around the world will continue hiking interest rates.

“I would probably say I’m leaning short on the equity markets right now because the upside-downside doesn’t make sense to me when I have so many people, so many central banks, telling me what they are going to do, what they want to do, what they expect to do,” Tepper said in a CNBC interview.

Key Words: Billionaire investor David Tepper would ‘lean short’ on stock market because central banks are saying ‘what they’re going to do’

A day earlier, the Conference Board’s consumer confidence survey came in at an eight-month high, which helped stoke a rally in stocks initially spurred by strong earnings from Nike Inc. and FedEx Corp. released Tuesday evening. This optimistic outlook helped stocks clinch their best daily performance in three weeks.

Volumes are starting to dry up as the year winds down, making markets more susceptible to bigger moves. According to Dow Jones Market Data, Wednesday saw the least combined volume on major exchanges since Nov. 29.

Read: Is the stock market open on Monday after Christmas Day?

In other economic data news, the U.S. leading index fell a sharp 1% in November, suggesting that the U.S. economy is heading toward a downturn.

Many market strategists are positioned defensively as they expect stocks could tumble to fresh lows in the new year.

See: Wall Street’s stock-market forecasts for 2022 were off by the widest margin since 2008: Will next year be any different?

Katie Stockton, a technical strategist at Fairlead Strategies, warned clients in a Thursday note that they should brace for more downside ahead.

“We expect the major indices to remain firm next week, helped by oversold conditions, but would brace for more downside in January given the recent downturn,” Stockton said.

Others said the latest data and comments from Tepper have simply refocused investors on the fact that the Fed, European Central Bank and now the Bank of Japan are preparing to continue tightening monetary policy.

“Yesterday was the short covering rally, but the bottom line is the trend is still short and we’re still fighting the Fed,” said Eric Diton, president and managing director of the Wealth Alliance.

Single-stock movers
  • AMC Entertainment Holdings 
    AMC,
    -14.91%
    was down sharply after the movie theater operator announced a $110 million equity capital raise.
  • Tesla Inc. 
    TSLA,
    -8.18%
    shares continued to tumble as the company has been one of the worst performers on the S&P 500 this year.
  • Shares of Verizon Communications Inc. 
    VZ,
    -0.53%
    were down again on Thursday as the company heads for its worst year on record.
  • Shares of CarMax Inc. 
    KMX,
    -6.60%
    tumbled after the used vehicle seller reported fiscal third-quarter profit and sales that dropped well below expectations.
  • Chipmakers and suppliers of equipment and materials, including Nvidia Corp.
    NVDA,
    -8.60%,
    Advanced Micro Devices 
    AMD,
    -7.17%
    and Applied Materials Inc.
    AMAT,
    -8.54%,
    were lower on Thursday.

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Business

Is it time to bail out of the stock market? Wild price swings are shaking the resolve of some investors.

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Is it time to bail out of stocks and bonds? This isn’t the market that investors likely signed up for back in 2021 when shares in GameStop Corp.
GME,
+4.69%
and movie chain AMC Entertainment Holdings
AMC,
+3.72%
were headed to the moon, drawing in droves investing neophytes.

The meme-stock frenzy, the one underpinned by social-media chatter as opposed to fundamentals, has fizzled, at least for now. Highflying technology stocks that could change the course of the world have been under pressure, as benchmark bond yields turn up with the promise of a Federal Reserve that is closing the purse-strings of too-loose monetary policy.

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Economists and market participants are predicting three, four, maybe as many as seven interest-rate increases, of about a 0.25 percentage points each, this year to tackle inflationary pressures that have gotten out of hand.

Read: What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

The upshot is that borrowing costs for individuals and companies are going up and the cheap costs of funds that helped to fuel a protracted bull market is going away.

Those factors have contributed partly to one of the ugliest January declines in the history of the technology-heavy Nasdaq Composite Index
COMP,
+3.13%,
which is down nearly 12%, with a single session left in the month, leaving one final attempt to avoid its worst monthly decline since October of 2008, FactSet data show.

Check out: Is the market crashing? No. Here’s what’s happening to stocks, bonds as the Fed aims to end the days of easy money, analysts say

What’s an investor to do?

Jason Katz, senior portfolio manager at UBS Financial Services, says that he’s had an “increased volume of hand-holding calls” from his high-net worth clients.

Katz said he’s telling investors that “it’s not about exiting the market now but making sure you are properly allocated.”

“It’s not a systemic problem we have in [financial markets], it’s a rerating,” of assets that fueled a speculative boom.

“You had a whole constituency of investments that should have never traded to where they did,” Katz said, “Aspirational stocks, meme stocks…all fueled by fiscal and monetary stimulus and this year it is about a great rerating,” of those assets, he said.

Art Hogan, chief market strategist at National Securities Corporation, told MarketWatch that losses come with the territory of investing but investors tend to feel it more acutely when stocks go down.

“It is our nature to feel losses more sharply than we enjoy gains. That is why selloffs always seem much more painful than rallies feel pleasurable,” Hogan said.

It is always important to note the difference between investing and trading. Traders purchase assets for the short term, while investors tend to buy assets with specific goals and time horizons in mind. Traders need to know when to take their losses, and live to trade another day, but investors who usually have time on their side need to invoke different tactics.

That is not to say that investors shouldn’t also be adept enough to cut their losses when the narrative shifts but such decisions should hinge on a change in the overall thesis for owning assets.

Hogan said that investors considering bailing on markets now need to ask themselves a few questions if they are “afraid.”

“’Have my reasons, for investing changed?’”

“’Have my goals changed? Has my time horizon for the money changed?,’” he said.

“Most importantly, ask yourself the question: ‘Am I skillful enough to get back into the market after the average drawdown has occurred,’” he said. “They certainly, don’t ring a bell at the [stock market] bottom,” Hogan said.

Data from the Schwab Center for Financial Research, examining a group of hypothetical investors over a 20-year time period, also supports the idea that being out of stocks, and in cash, for example, is unlikely to outperform investing in equities, even if investors were badly timing the market.

“The best course of action for most of us is to create an appropriate plan and take action on that plan as soon as possible. It’s nearly impossible to accurately identify market bottoms on a regular basis,” according to findings from Schwab’s research.

To be sure, the market going forward is likely to be tough sledding for investors, with some speculating about the possibility of a recession. The Russell 2000 index
RUT,
+1.93%
entered a bear market last week, falling at least 20% from its recent peak. And the yields for the 10-year
TMUBMUSD10Y,
1.771%
and 2-year Treasury notes
TMUBMUSD02Y,
1.164%
have compressed, usually viewed as a sign of an impending recession if the yields for shorter dated bonds rise above those for longer maturities.

And the rest of the stock market, looks fragile, even after a Friday flourish into the close, other equity bourses are looking at big monthly losses. Beyond the Nasdaq Composite, the Dow Jones Industrial Average
DJIA,
+1.65%
is down 4.4% so far in January, the S&P 500 index
SPX,
+2.43%
is off 7% thus far in the month and the Russell 2000 index is down 12.3% month to date.

Katz said that he’s advising many of his clients to look for quality stocks. ”

“High-quality growth and tech names have been wearing the black eye for [speculative tech], but “those [quality] stocks are starting to find their footing,” he said.

Indeed, Apple Inc.
AAPL,
+6.98%,
for example, surged 7% on Friday to mark its best percentage gain since July 31, 2020.

Katz also said international, and developing markets are good investments as well as small and midcap stocks. “I would remain long equities here, it’s just the right equities,” the UBS wealth manager said.

That said, wild intra and interday price swings are likely to continue to be a feature of this phase in financial markets, as the economy transitions from the COVID-19 pandemic and toward a regime of higher rates.

But slumps don’t necessarily mean the end of the world.

“Not every pullback becomes a correction, and not every correction becomes a bear…and not every bear becomes a diaster,” Katz said.  

Hogan said that downturns also can be viewed as opportunities.

“Volatility is a feature not a bug, and the price we pay for the long-term higher average returns in the U.S. equity market,” he said.

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Business

Get ready for the climb. Here’s what history says about stock-market returns during Fed rate-hike cycles.

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Bond yields are rising again so far in 2022. The U.S. stock market seems vulnerable to a bona fide correction. But what can you really tell from a mere two weeks into a new year? Not much and quite a lot.

One thing feels assured: the days of making easy money are over in the pandemic era. Benchmark interest rates are headed higher and bond yields, which have been anchored at historically low levels, are destined to rise in tandem.

Read: Weekend reads: How to invest amid higher inflation and as interest rates rise

It seemed as if Federal Reserve members couldn’t make that point any clearer this past week, ahead of the traditional media blackout that precedes the central bank’s first policy meeting of the year on Jan. 25-26.

The U.S. consumer-price and producer-price index releases this week have only cemented the market’s expectations of a more aggressive or hawkish monetary policy from the Fed.

The only real question is how many interest-rate increases will the Federal Open Market Committee dole out in 2022. JPMorgan Chase & Co.
JPM,
-6.15%
CEO Jamie Dimon intimated that seven might be the number to beat, with market-based projections pointing to the potential for three increases to the federal funds rate in the coming months.

Check out: Here’s how the Federal Reserve may shrink its $8.77 trillion balance sheet to combat high inflation

Meanwhile, yields for the 10-year Treasury note yielded 1.771% Friday afternoon, which means that yields have climbed by about 26 basis points in the first 10 trading days to start a calendar year, which would be the briskest such rise since 1992, according to Dow Jones Market Data. Back 30 years ago, the 10-year rose 32 basis points to around 7% to start that year.

The 2-year note
TMUBMUSD02Y,
0.960%,
which tends to be more sensitive to the Fed’s interest rate moves, is knocking on the door of 1%, up 24 basis points so far this year, FactSet data show.

But do interest rate increases translate into a weaker stock market?

As it turns out, during so-called rate-hike cycles, which we seem set to enter into as early as March, the market tends to perform strongly, not poorly.

In fact, during a Fed rate-hike cycle the average return for the Dow Jones Industrial Average
DJIA,
-0.56%
is nearly 55%, that of the S&P 500
SPX,
+0.08%
is a gain of 62.9% and the Nasdaq Composite
COMP,
+0.59%
has averaged a positive return of 102.7%, according to Dow Jones, using data going back to 1989 (see attached table). Fed interest rate cuts, perhaps unsurprisingly, also yield strong gains, with the Dow up 23%, the S&P 500 gaining 21% and the Nasdaq rising 32%, on average during a Fed rate hike cycle.

Dow Jones Market Data

Interest rate cuts tend to occur during periods when the economy is weak and rate hikes when the economy is viewed as too hot by some measure, which may account for the disparity in stock market performance during periods when interest-rate reductions occur.

To be sure, it is harder to see the market producing outperformance during a period in which the economy experiences 1970s-style inflation. Right now, it feels unlikely that bullish investors will get a whiff of double-digit returns based on the way stocks are shaping up so far in 2022. The Dow is down 1.2%, the S&P 500 is off 2.2%, while the Nasdaq Composite is down a whopping 4.8% thus far in January.

Read: Worried about a bubble? Why you should overweight U.S. equities this year, according to Goldman

What’s working?

So far this year, winning stock market trades have been in energy, with the S&P 500’s energy sector
SP500.10,
+2.44%

XLE,
+2.35%
looking at a 16.4% advance so far in 2022, while financials
SP500.40,
-1.01%

XLF,
-1.04%
are running a distant second, up 4.4%. The other nine sectors of the S&P 500 are either flat or lower.

Meanwhile, value themes are making a more pronounced comeback, eking out a 0.1% weekly gain last week, as measured by the iShares S&P 500 Value ETF
IVE,
-0.14%,
but month to date the return is 1.2%.

See: These 3 ETFs let you play the hot semiconductor sector, where Nvidia, Micron, AMD and others are growing sales rapidly

What’s not working?

Growth factors are getting hammered thus far as bond yields rise because a rapid rise in yields makes their future cash flows less valuable. Higher interest rates also hinder technology companies’ ability to fund stock buy backs. The popular iShares S&P 500 Growth ETF
IVW,
+0.28%
is down 0.6% on the week and down 5.1% in January so far.

What’s really not working?

Biotech stocks are getting shellacked, with the iShares Biotechnology ETF
IBB,
+0.65%
down 1.1% on the week and 9% on the month so far.

And a popular retail-oriented ETF, the SPDR S&P Retail ETF
XRT,
-2.10%
tumbled 4.1% last week, contributing to a 7.4% decline in the month to date.

And Cathie Wood’s flagship ARK Innovation ETF
ARKK,
+0.33%
finished the week down nearly 5% for a 15.2% decline in the first two weeks of January. Other funds in the complex, including ARK Genomic Revolution ETF
ARKG,
+1.04%
and ARK Fintech Innovation ETF
ARKF,
-0.99%
are similarly woebegone.

And popular meme names also are getting hammered, with GameStop Corp.
GME,
-4.76%
down 17% last week and off over 21% in January, while AMC Entertainment Holdings
AMC,
-0.44%
sank nearly 11% on the week and more than 24% in the month to date.

Gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are on the rise, and prompting analysts and traders to weigh the potential financial-market shock waves. Here’s what his reporting says about geopolitical risk factors and their longer-term impact on markets.

Week ahead

U.S. markets are closed in observance of the Martin Luther King Jr. holiday on Monday.

Read: Is the stock market open on Monday? Here are the trading hours on Martin Luther King Jr. Day

Notable U.S. corporate earnings

(Dow components in bold)
TUESDAY:

Goldman Sachs Group
GS,
-2.52%,
Truist Financial Corp.
TFC,
+0.96%,
Signature Bank
SBNY,
+0.07%,
PNC Financial
PNC,
-1.33%,
J.B. Hunt Transport Services
JBHT,
-1.04%,
Interactive Brokers Group Inc.
IBKR,
-1.22%

WEDNESDAY:

Morgan Stanley
MS,
-3.58%,
Bank of America
BAC,
-1.74%,
U.S. Bancorp.
USB,
+0.09%,
State Street Corp.
STT,
+0.32%,
UnitedHealth Group Inc.
UNH,
+0.27%,
Procter & Gamble
PG,
+0.96%,
Kinder Morgan
KMI,
+1.82%,
Fastenal Co.
FAST,
-2.55%

THURSDAY:

Netflix
NFLX,
+1.25%,
United Airlines Holdings
UAL,
-2.97%,
American Airlines
AAL,
-4.40%,
Baker Hughes
BKR,
+4.53%,
Discover Financial Services
DFS,
-1.44%,
CSX Corp.
CSX,
-0.82%,
Union Pacific Corp.
UNP,
-0.55%,
The Travelers Cos. Inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp.
KEY,
+1.16%

FRIDAY:

Schlumberger
SLB,
+4.53%,
Huntington Bancshares Inc.
HBAN,
+1.73%

U.S. economic reports

Tuesday

  • Empire State manufacturing index for January due at 8:30 a.m. ET
  • NAHB home builders index for January at 10 a.m.

Wednesday

  • Building permits and starts for December at 8:30 a.m.
  • Philly Fed Index for January at 8:30 a.m.

Thursday

  • Initial jobless claims for the week ended Jan. 15 (and continuing claims for Jan. 8) at 8:30 a.m.
  • Existing home sales for December at 10 a.m.

Friday

Leading economic indicators for December at 10 a.m.

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