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Business

Stocks got wrecked by rate shock in 2022. Here’s what will drive market in 2023.

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2022 is over. Take a breath.

Investors were understandably eager to ring the bell on the stock market’s worst year since 2008, with the S&P 500
SPX,
-0.25%
falling 19.4%, the Dow Jones Industrial Average
DJIA,
-0.22%
dropping 8.8% and the Nasdaq Composite
COMP,
-0.11%
shedding 33.1%.

Adding to the pain, the bond market was also a disaster, with some segments seeing their biggest annual losses in history while U.S. Treasury prices slumped, sending yields soaring.

That offered a rare double whammy for investors, who usually see portfolios cushioned by bonds when equities suffer.

So now what? The flip of the calendar doesn’t make the factors that drove market losses in 2022 go away, but it offers investors an opportunity to think about how the economy and the markets will evolve in the year ahead.

A rate shock as the Federal Reserve ratcheted up interest rates at a historically rapid pace in its effort to rein in inflation set the tone in 2022. A return to higher rates — and what may be the end of a four-decade era of falling interest rates — is expected to reverberate in 2023 and beyond.

The Tell: End of 40-year era of falling interest rates is crucial ‘sea change’ for investors: Howard Marks

While inflation, still elevated, shows signs it has peaked, the market was robbed of a seasonal rally heading into the new year by fears the Fed’s continued efforts will spark a recession that will devastate corporate earnings in 2023.

Read: How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter

The interplay between Fed policy, inflation, economic growth and earnings will drive the market in 2023, analysts say.

The Fed

“This has been a Fed-led market that’s been predicated on inflation that was not transitory,” as monetary policy makers had initially believed, said Quincy Krosby, chief global strategist at LPL Financial, in a phone interview.

The Fed dropped the “transitory rhetoric” and launched an aggressive campaign to tackle inflation. “That’s led to a market that’s concerned about economic growth and whether we enter 2023 facing a significant economic downturn,” Krosby said.

Inflation

Investors, however, might find some optimism in signs inflation has peaked, analysts said.

“The days of sub-2% CPI that we enjoyed from ’08-’20 are likely gone, possibly for a long time. But inflation could fall far enough (3%-4%) for the Fed to essentially think it has accomplished its mission (although it won’t say it directly as the target is still 2%), but for all intents and purposes, we could exit 2023 without a material inflation problem,” said Tom Essaye, president of Sevens Report Research, in a Friday note.

Skeptics doubt that a slowdown in inflation will be sufficient to keep the Fed from following through on its indications it intends to raise the fed-funds rate above 5% and keep it there for some time.

Hedge-fund titan David Tepper in a December interview with CNBC said he was “leaning short” on the stock market “because I think the upside/downside just doesn’t make sense to me when I have so many…central banks telling me what they’re going to do.”

See: Fed officials reinforce stern message of slowing inflation by higher interest rates

Recession fears

A resilient job market so far has optimists — and Fed officials — arguing that the economy could avoid a so-called hard landing as monetary policy continues to tighten.

Also read: Stock-market investors face 3 recession scenarios in 2023

Investors, however, “are anticipating an economic recession to materialize early in 2023, as evidenced by the three quarters of projected S&P 500 index earnings declines and continued defensive sector leanings,” said Sam Stovall, chief investment strategist at CFRA, in a Wednesday note. “The severity of the recession remains in question. We expect it to be mild.”

The bear market for the S&P 500 is backdated to Jan. 3, 2022, when it closed at a record high before beginning its slide. It ended with a yearly loss of 19.4%.

“The average bear market since World War II has lasted 14 months and resulted in a decline of 35.7% from the previous high,” wrote analysts at Glenmede in a December note.

“At approximately 12 months and 20%, the current bear market appears to be close to 2/3 of the way through the typical bear-market decline. The current market appears to be following a similar trajectory of an average historical bear market so far,” they wrote. “Based on past trends, on average, bear markets do not bottom until after a recession begins, but before a recession ends.”

Related: How long will stocks stay in a bear market? It hinges on if a recession hits, says Wells Fargo Institute

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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

The stock market is sliding because investors fear recession more than inflation

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A stock-market paradox, in which bad news about the economy is seen as good news for equities, may have run its course. If so, investors should expect bad news to be bad news for stocks heading into the new year — and there may be plenty of it.

But first, why would good news be bad news? Investors have spent 2022 largely focused on the Federal Reserve and its rapid series of large rate hikes aimed at bringing inflation to heel. Economic news pointing to slower growth and less fuel for inflation could serve to lift stocks on the idea that the Fed could begin to slow the pace or even begin entertaining future rate cuts.

Conversely, good news on the economy could be bad news for stocks.

So what’s changed? The past week saw a softer-than-expected November consumer-price index reading. While still running mighty hot, with prices rising more than 7% year over year, investors are increasingly confident that inflation likely peaked at a roughly four-decade high above 9% in June.

See: Why November’s CPI data are seen as a ‘game-changer’ for financial markets

But the Federal Reserve and other major central banks indicated they intend to keep lifting rates, albeit at a slower pace, into 2023 and likely keep them elevated longer than investors had anticipated. That’s stoking fears that a recession is becoming more likely.

Meanwhile, markets are behaving as if the worst of the inflation scare is in the rearview mirror, with recession fears now looming on the horizon, said Jim Baird, chief investment officer of Plante Moran Financial Advisors.

That sentiment was reinforced by manufacturing data Wednesday and a weaker-than-expected retail sales reading on Thursday, Baird said, in a phone interview.

Markets are “probably headed back to a period where bad news is bad news not because rates will be driving concerns for investors, but because earnings growth will falter,” Baird said.

A ‘reverse Tepper trade’

Keith Lerner, co-chief investment officer at Truist, argued that a mirror image of the backdrop that produced what became known as the “Tepper trade,” inspired by hedge-fund titan David Tepper in September 2010, may be forming.

Unfortunately, while Tepper’s prescient call was for a “win/win scenario.” the “reverse Tepper trade” is shaping up as a lose/lose proposition, Lerner said, in a Friday note.

Tepper’s argument was that the economy was either going to get better, which would be positive for stocks and asset prices. Or, the economy would weaken, with the Fed stepping in to support the market, which would also be positive for asset prices.

The current setup is one in which the economy is going to weaken, taming inflation but also denting corporate profits and challenging asset prices, Lerner said. Or, instead, the economy remains strong, along with inflation, with the Fed and other central banks continuing to tighten policy, and challenging asset prices.

“In either case, there’s a potential headwind for investors. To be fair, there is a third path, where inflation comes down, and the economy avoids recession, the so-called soft landing. It’s possible,” Lerner wrote, but noted the path to a soft landing looks increasingly narrow.

Recession jitters were on display Thursday, when November retail sales showed a 0.6% fall, exceeding forecasts for a 0.3% decline and the biggest drop in almost a year. Also, the Philadelphia Fed’s manufacturing index rose, but remained in negative territory, disappointing expectations, while the New York Fed’s Empire State index fell.

Read: Still a bear market: S&P 500 slump signals stocks never reached ‘escape velocity’

Stocks, which had posted moderate losses after the Fed a day earlier lifted interest rates by half a percentage point, tumbled sharply. Equities extended their decline Friday, with the S&P 500
SPX,
-1.11%
logging a 2.1% weekly loss, while the Dow Jones Industrial Average
DJIA,
-0.85%
shed 1.7% and the Nasdaq Composite
COMP,
-0.97%
dropped 2.7%.

“As we move into 2023, economic data will become more of an influence over stocks because the data will tell us the answer to a very important question: How bad will the economic slowdown get? That’s the key question as we begin the new year, because with the Fed on relative policy ‘auto pilot’ (more hikes to start 2023) the key now is growth, and the potential damage from slowing growth,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.

Recession watch

No one can say with complete certainty that a recession will occur in 2023, but it seems there’s no question corporate earnings will come under pressure, and that will be a key driver for markets, said Plante Moran’s Baird. And that means earnings have the potential to be a significant source of volatility in the year ahead.

“If in 2022 the story was inflation and rates, for 2023 it’s going to be earnings and recession risk,” he said.

It’s no longer an environment that favors high-growth, high risk equities, while cyclical factors could be setting up nicely for value-oriented stocks and small caps, he said.

Truist’s Lerner said that until the weight of the evidence shifts, “we maintain our overweight in fixed income, where we are focused on high quality bonds, and a relative underweight in equities.”

Within equities, Truist favors the U.S., a value tilt, and sees “better opportunities below the market’s surface,” such as the equal-weighted S&P 500, a proxy for the average stock.

Highlights of the economic calendar for the week ahead include a revised look at third-quarter gross domestic product on Thursday, along with the November index of leading economic indicators. On Friday, November personal consumption and spending data, including the Fed’s preferred inflation gauge are set for release.

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Health

How I’m Staying in Shape by Turning My Daily Stroll Into Hard Exercise

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If I read one more time that walking is the best exercise, I’m going to take a few steps and scream.

This article is about how to make walking a better exercise.

True, walking is the most practicable exercise. You can pretty much do it anywhere anytime. That is no small thing.

The problem is that ordinary walking won’t push your heartbeat rate into the same zone as running or a fast bicycle ride or even a game of pickleball, one study found.

Why does intensity matter? Vigorous workouts are a more efficient way of getting fit, says cardiologist Matthew Nayor, an assistant professor at the Boston University School of Medicine, who tested the fitness of more than 3,000 participants in the Framingham Heart Study. He found that a minute of moderate to vigorous exercise had the same benefit as two or three minutes of light exercise.

How do you know if the exercise is vigorous enough? If you can carry on a conversation easily, it is probably moderate exercise, Nayor says. “If the sentences get shorter, and it is harder to carry on a conversation, you’re headed toward vigorous exercise.”

There are simple tricks you can use to transform leisurely walks into intense exercise. That includes walking up hills, carrying a weighted backpack, or working a few sprints into your daily perambulation. Perhaps the best trick of all is to walk really fast.

I have done all these things since Aug. 14, the day I turned my bicycle too sharply onto a gravel road near my New Jersey home and was slammed down, breaking two bones in my right wrist and partially tearing a tendon. That hurt.

At the time, I was training roughly 12 hours a week in preparation for an October bike ride across Italy with high school friends.

I saw a hand surgeon the next day and he told me I probably wouldn’t need surgery but that I could forget about biking in Italy. He put my wrist in a splint and said I couldn’t drive a car, much less get on a bike for a good while.

That hurt even more. Not only was I forgoing the trip to Italy, but I had spent months getting in the best shape in years. Now I was going to lose it all.

I started walking the next day to avoid that fate. Am I in biking shape? No way. But I have kept relatively fit by going on a hard daily walk. I passed a previously scheduled heart stress test a couple of weeks after my bike crash, and my resting pulse rate—one way to measure how healthy your heart is-—is about the same as when I was riding 12 hours a week.

Like any exercise regime, you should talk to your doctor before doing intense walking. This is particularly true if you’re older.

Here are the tactics I used to step up my daily walking routine. Anybody with a pair of walking shoes can use these.

Sprint Once in Awhile

Short bursts of intense workout woven into your daily walk will greatly improve its cardiovascular benefits.

“High-intensity interval training is basically doing an activity ‘as hard as you can’ for about 30 seconds, whether it be walking, running, cycling, swimming, then taking one to two minutes of recovery at a more easy pace,” explains Edward Laskowski, a doctor of sports medicine at the Mayo Clinic in Rochester,

Walking in a hilly area is a natural sort of interval training. When you walk up the hill, that is the high intensity part. When you walk down, that is the recovery.

If you live in a flat area, try doing a few short sprints during your walk. Take your time to recover after each sprint. I prefer sprinting on grass, which I do at a local park.

Carry Weights

A weighted rucksack or vest can turn your stroll into a taxing workout. When I don’t feel like walking fast, I put on a 30-pound backpack and walk through a nearby forest with some hills. I’m exhausted by the time I get back to my house.

You can buy rucksacks with secured weight plates so things won’t bounce around. I’m a cheapskate, so I just took a weight set we had sitting around and used duct tape and cardboard to construct a stable weight that I could secure inside a backpack.

Pick Up Your Pace

This is the most tiring workout of all.

If you want to walk faster than 4 or perhaps 4.5 miles an hour, a brisk pace for most walkers, you have to bend your arms and swing them like a racewalker. Here’s a demonstration. The more you swing your arms like this, the faster you’ll step. Trained race walkers can walk at 9 or 10 miles an hour. You read that right. Here’s a video of Tom Bosworth of England walking a mile in 5 minutes and 31 seconds. It’s difficult to run a mile that fast.

The fastest I’ve managed recently isn’t quite 5 miles an hour—less than half the pace of Bosworth!—and a 4 mile walk at that pace left me completely thrashed. It was absolutely as hard as a run or a hard bike ride. My legs were almost quivering by the end because—I can’t believe I’m writing this—walking can be the best exercise if done right.

Write to Neal Templin at neal.templin@barrons.com

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Business

Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.

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So far, so good?

Stocks ended the first full week of the earnings season on a strong note Friday, pushing the Dow Jones Industrial Average
DJIA,
+2.47%,
S&P 500
SPX,
+2.37%
and Nasdaq Composite
COMP,
-0.81%
to their strongest weekly gains since June. It gets more hectic in the week ahead, with 165 S&P 500 companies, including 12 Dow components, due to report results, according to FactSet, making it the busiest week of the season.

The bar for earnings was set high last year as the global economy reopened from its pandemic-induced state. “Fast forward to this year, and earnings are facing tougher comparisons on a year-over-year basis. Add in the elevated risk of a recession, still hot inflation, and an aggressive Fed tightening cycle, and it is of little surprise that the sentiment surrounding the current 3Q22 earnings season is cautious,” said Larry Adam, chief investment officer for the private client group at Raymond James, in a Friday note.

“We have reason to believe the 3Q22 earnings season will be better than feared and could become a positive catalyst for equities just as the 2Q22 results were,” he wrote.

Read: Stocks are attempting a bounce as earnings season begins. Here’s what it will take for the gains to stick.

Better-than-feared earnings were credited with helping to fuel a stock-market rally from late June to early August, with equities bouncing back sharply from what were then 2020 lows before succumbing to fresh rounds of selling that, by the end of September, took the S&P 500 to its lowest close since November 2020.

While earnings weren’t the only factor in the past week’s gains, they probably didn’t hurt.

The number of S&P 500 companies reporting positive earnings surprises and the magnitude of these earnings surprises increased over the past week, noted John Butters, senior earnings analyst at FactSet, in a Friday note.

Even with that improvement, however, earnings beats are still running below long-term averages.

Through Friday, 20% of the companies in the S&P 500 had reported third-quarter results. Of these companies, 72% reported actual earnings per share, or EPS, above estimates, which is below the 5-year average of 77% and below the 10-year average of 73%, Butters said. In aggregate, companies are reporting earnings that are 2.3% above estimates, which is below the 5-year average of 8.7% and below the 10-year average of 6.5%.

Meanwhile, the blended-earnings growth rate, which combines actual results for companies that have reported with estimated results for companies that have yet to report, rose to 1.5% compared with 1.3% at the end of last week, but it was still below the estimated earnings growth rate at the end of the quarter at 2.8%, he said. And both the number and magnitude of positive earnings surprises are below their 5-year and 10-year averages. On a year-over-year basis, the S&P 500 is reporting its lowest earnings growth since the third quarter of 2020, according to Butters.

The blended-revenue growth rate for the third quarter was 8.5%, compared with a revenue growth rate of 8.4% last week and a revenue growth rate of 8.7% at the end of the third quarter.

Next week’s lineup accounts for over 30% of the S&P 500’s market capitalization, Adam said. And with the tech sector accounting for around 20% of the index’s earnings, reports from Visa Inc.
V,
+1.68%,
Google parent Alphabet Inc.
GOOG,
+0.94%

GOOGL,
+1.16%,
Microsoft Corp.
MSFT,
+2.53%,
Amazon.com Inc.
AMZN,
+3.53%
and Apple Inc.
AAPL,
+2.71%
will be closely watched.

Away from the backward-looking numbers, guidance from executives on the path ahead will be crucial against a backdrop of recession fears, Adam wrote, noting that so far guidance has remained resilient, with the net percentage of companies raising rather than lowering their outlook remaining positive.

“For example, the ‘Summer of Revenge Travel’ was known to benefit the airlines, but commentary from United
UAL,
+3.56%,
American
AAL,
+1.86%
and Delta Airlines
DAL,
+1.34%
suggests demand remains strong for the months ahead and into 2023. Ultimately, the broader based and better the forward guidance, the higher the confidence in our $215 S&P 500 earnings target for 2023,” Adam said.

The soaring U.S. dollar
DXY,
-0.89%,
which remains not far off a two-decade high set at the end of last month, also remains a concern.

See: How the strong dollar can affect your financial health

“While the degree of the impact depends on the blend of costs versus sales overseas and how much of the currency risk is hedged, a stronger dollar typically impairs earnings,” Adam wrote.

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Business

U.S. stocks struggling to make ‘crazy’ bounce-back rally stick as earnings season gets under way

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U.S. stocks saw early gains fizzle Friday, with the market turning south after attempting to build on a bounce in the previous session that marked what’s been called one of the craziest market days in history.

Stocks turned lower after a closely watched survey showed consumer inflation expectations were on the rise, while investors were also weighing a round of results from big Wall Street banks as earnings reporting season gets under way.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -0.80%
    fell 223 points, or 0.7%, to 29,815, after rising 390 points at its session high.
  • The S&P 500
    SPX,
    -1.67%
    was down 58 points, or 1.6%, at 3,612.
  • The Nasdaq Composite declined 227 points, or 2.1%, to 10,422.

On Thursday, the Dow erased a plunge of nearly 550 points to end 828 points higher, while the S&P 500 bounced back from a loss of more than 2% to end 2.6% higher, and the Nasdaq Composite jumped 2.2%.

The Dow’s 2.8% rise was the largest one-day gain since Nov. 9, 2020.

See: Why stocks scored a historic bounce after another hot inflation report

What’s driving markets

Gains early Friday gave way to losses after the University of Michigan’s consumer sentiment survey showed expectations for inflation over the next year rose to 5.1% from September’s one-year low of 4.7%, while expectations for inflation over the next 5 years ticked up to 2.9% from 2.7% last month.

“The uptick in inflation expectations probably is a response to the increase in gas prices in recent weeks, in which case it won’t continue,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note, observing that preliminary readings tend to see big revisions.

“Still, on the heels of the September inflation data this rebound — reversing the drop last month — does not look good, given how closely policy makers appear to track the measure,” Shepherdson said.

The survey’s gauge of consumer sentiment rose to 59.8 in October from 58.6. Economists were expecting a reading of 59, according to a Wall Street Journal poll.

Data Friday also showed U.S. retail sales were unchanged in September, coming in below forecasts for a 0.3% rise. Excluding autos, sales rose 0.3%.

Analysts cited a number of factors to explain the huge rise in stocks on Thursday, which came after equities initially tanked following a hotter-than-expected September consumer-price index reading.

Factors behind the bounce included technical and positioning considerations after a steep selloff that had seen the S&P 500 index tumble for six sessions in a row to end Wednesday at its lowest since November 2020.

“Among the most frequent explanations is that the most pessimistic of all possible scenarios were built into prices: a 75-point rate hike at the next two meetings,” said Alex Kuptsikevich, senior market analyst at FxPro, in a note. “After this, market participants turned their attention to substantial discounts to prices from their highs with a relatively healthy economy that continues to create jobs and raise wages,”

But caution still prevailed on Friday.

“Despite October’s notoriety as a ‘bear market killer’ and an auspicious intraday move, investors should maintain a certain degree of caution. A real change in trend requires a shift in fundamentals. And those changes are still not easy to identify,” Kuptsikevich said.

Rick Rieder, the chief investment officer for fixed income at BlackRock, told MarketWatch’s Christine Idzelis that Thursday’s gyrations marked one of the “craziest” days in market history, coming after data showing U.S. September inflation running at a hotter-than-expected pace.

“One of the largest intraday reversals in recent memory off a closely watched CPI print underscores the oversold condition and sentiment extreme in this market. The vulnerability wasn’t in the number, the vulnerability was in the positioning leading up to the number,” said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.

BlackRock’s Rieder advised investors to consider parking their money in short-term bonds, a point recently echoed by hedge-fund legend Ray Dalio.

Shares of JPMorgan Chase & Co.
JPM,
+3.39%
were up 2.7% after the bank and Dow component beat Wall Street targets for earnings and revenue.

Analysts were also weighing results from Wells Fargo & Co.
WFC,
+3.52%
and Morgan Stanley
MS,
-4.25%,
and Citigroup Inc.
C,
+1.43%.

See: JPMorgan profit falls but beats estimates while Wells Fargo misses

Investors were also monitoring developments in the U.K., where Prime Minister Liz Truss fired Kwasi Kwarteng from his role as chancellor of the exchequer. Yields on U.K. government bonds spiked after Kwarteng presented a budget plan that included large tax cuts in late September, sparking a crisis that required the Bank of England to step in with an emergency buying program.

Read: Why Kwasi Kwarteng could not survive the battle with the Bank of England

U.K. bond yields initially dropped on Friday on indications many of the planned tax cuts would be reversed. But they later rose after Truss only reversed corporate tax cuts.

Also see: Larry Summers says U.K. debt market stress could be the ‘tremor’ signaling global economic ‘earthquake’

The Federal Reserve needs to continue raising interest rates but should be careful about the pace of these moves, Kansas City Fed President Esther George said on Friday.

Companies in focus
  • Wells Fargo
    WFC,
    +3.52%
    shares rose 3.8% after the bank posted stronger-than-expected revenue for the third quarter, offsetting a profit miss.
  • Shares of Morgan Stanley
    MS,
    -4.25%
    fell 4.5% after the investment bank missed Wall Street’s targets for earnings and revenue amid a drop in deal activity.
  • Citigroup
    C,
    +1.43%
    shares rose 1.9% after the bank topped Wall Street forecasts on earnings and revenue.
  • UnitedHealth Group Inc.
    UNH,
    +1.77%
    shares were up 1.6% after the Dow component and health insurer reported third-quarter profit and revenue that rose above expectations, and lifted its full-year outlook for a third-straight quarter.
  • Kroger Co.
    KR,
    -5.04%
    announced a $24.6 billion deal to buy Albertsons Cos. Inc.
    ACI,
    -7.39%.
    Under the terms of the merger agreement, Kroger will acquire all of the shares outstanding of Albertsons’ common and preferred stock for an estimated $34.10 per share. Kroger shares fell 4.9%, while Albertsons was off 7%. Shares of Albertsons jumped more than 11% Thursday on reports of a potential deal, while Kroger rose 2%.
  • Beyond Meat Inc.
    BYND,
    -6.02%
    shares fell 6.2% after the plant-based food company issued a revenue warning, announced a plan to cut about 200 workers and said it’s cutting other costs as it makes a strategic shift aimed at achieving positive cash flow operations.

Also see: Beyond Meat COO Douglas W. Ramsey is leaving the company after being suspended for allegedly biting a man’s nose

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Business

Stocks crashing? No, but here’s why this bear market feels so painful — and what you can do about it.

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Hashtags about a stock-market crash may be trending on Twitter, but the selloff that has sent U.S. equities into a bear market has been relatively orderly, say market professionals. But it’s likely to get more volatile — and painful — before the market stabilizes.

It was indeed a white-knuckle ride for investors Friday as the Dow Jones Industrial Average
DJIA,
-1.62%
plunged more than 800 points and the S&P 500 index
SPX,
-1.72%
traded below its 2022 closing low from mid-June before trimming losses ahead of the bell. The Dow sank to its lowest close since November 2020, leaving it on the brink of joining the S&P 500 in a bear market.

Why is the stock market falling?

Rising interest rates are the main culprit. The Federal Reserve is raising its benchmark interest rate in historically big increments — and plans to keep raising them — as it attempts to pull inflation back to its 2% target. As a result, Treasury yields have soared. That means investors can earn more than in the past by parking money in government paper, raising the opportunity cost of investing in riskier assets like stocks, corporate bonds, commodities or real estate.

Historically low interest rates and ample liquidity provided by the Fed and other central banks in the wake of the 2008 financial crisis and the 2020 pandemic helped drive demand for riskier assets such as stocks.

That unwinding is part of the reason why the selloff, which isn’t limited to stocks, feels so harsh, said Michael Arone, chief investment strategist for the SPDR business at State Street Global Advisors.

“They’ve struggled with the idea that stocks are down, bonds are down, real estate is starting to suffer. From my viewpoint it’s the fact that interest rates are rising so rapidly, resulting in declines across the board and volatility across the board,” he said, in a phone interview.

How bad is it?

The S&P 500 index ended Friday down 23% from its record close of 4,796.56 hit on Jan. 3 this year.

That’s a hefty pullback, but it’s not out of the ordinary. In fact, it’s not even as bad as the typical bear-market retreat. Analysts at Wells Fargo studied 11 past S&P 500 bear markets since World War II and found that the downdrafts, on average, lasted 16 months and produced a negative 35.1% bear-market return.

A decline of 20% or more (a widely used definition of a bear market) has occurred in 9 of the 42 years going back to 1980, or about once every five years, said Brad McMillan, chief investment officer for Commonwealth Financial Network, in a note.

“Significant declines are a regular and recurring feature of the stock market,” he wrote. “In that context, this one is no different. And since it is no different, then like every other decline, we can reasonably expect the markets to bounce back at some point.”

What’s ahead?

Many market veterans are bracing for further volatility. The Fed and its chairman, Jerome Powell, signaled after its September meeting that policy makers intend to keep raising interest rates aggressively into next year and to not cut them until inflation has fallen. Powell has warned that getting inflation under control will be painful, requiring a period of below-trend economic growth and rising unemployment.

Many economists contend the Fed can’t whip inflation without sinking the economy into a recession. Powell has signaled that a harsh downturn can’t be ruled out.

“Until we get clarity on where the Fed is likely to end” its rate-hiking cycle, “I would expect to get more volatility,” Arone said.

Meanwhile, there may be more shoes to drop. Third-quarter corporate earnings reporting season, which gets under way next month, could provide another source of downside pressure on stock prices, analysts said.

“We’re of the view that 2023 earnings estimates have to continue to decline,” wrote Ryan Grabinski, investment strategist at Strategas, in a note. “We have our 2023 recession odds at about 50% right now, and in a recession, earnings decline by an average of around 30%. Even with some extreme scenarios—like the 2008 financial crisis when earnings fell 90% — the median decline is still 24%.”

The consensus 2023 earnings estimate has only come down 3.3% from its June highs, he said, “and we think those estimates will be revised lower, especially if the odds of a 2023 recession increase from here,” Grabinski wrote.

What to do?

Arone said sticking with high quality value stocks that pay dividends will help investors weather the storm, as they tend to do better during periods of volatility. Investors can also look to move closer to historical benchmark weightings, using the benefits of diversification to protect their portfolio while waiting for opportunities to put money to work in riskier parts of the market.

But investors need to think differently about their portfolios as the Fed moves from the era of easy money to a period of higher interest rates and as quantitative easing gives way to quantitative tightening, with the Fed shrinking its balance sheet.

“Investors need to pivot to thinking about what might benefit from tighter monetary policy,” such as value stocks, small-cap stocks and bonds with shorter maturities, he said.

How will it end?

Some market watchers argue that while investors have suffered, the sort of full-throttle capitulation that typically marks market bottoms has yet to materialize, though Friday’s selloff at times carried a whiff of panic.

The Fed’s aggressive interest rate rises have stirred market volatility, but haven’t caused a break in the credit markets or elsewhere that would give policy makers pause.

Meanwhile, the U.S. dollar remains on a rampage, soaring over the past week to multidecade highs versus major rivals in a move driven by the Fed’s policy stance and the dollar’s status as a safe place to park.

A break in the dollar’s relentless rally “would suggest to me that the tightening cycle and some of the fear — because the dollar is a haven — is starting to subside,” Arone said. “We’re not seeing that yet.”

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World

South Korea offers North ‘audacious’ economic benefits for denuclearization

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SEOUL, South Korea — South Korean President Yoon Suk Yeol on Monday offered “audacious” economic assistance to North Korea if it abandons its nuclear weapons program while avoiding harsh criticism of the North days after it threatened “deadly” retaliation over the COVID-19 outbreak it blames on the South.

In a speech celebrating the end of Japan’s colonization of the Korean Peninsula, Yoon also called for better ties with Japan, calling the two countries partners in navigating challenges to freedom and saying their shared values will help them overcome historical grievances linked to Japan’s brutal colonial rule before the end of World War II.

Yoon’s televised speech on the liberation holiday came days after North Korea claimed a widely disputed victory over COVID-19 but also blamed Seoul for the outbreak. The North insists leaflets and other objects flown across the border by activists spread the virus, an unscientific claim Seoul describes as “ridiculous.”

North Korea has a history of dialing up pressure on the South when it doesn’t get what it wants from the United States, and there are concerns that North Korea’s threat portends a provocation, which could possibly be a nuclear or major missile test or even border skirmishes. Some experts say the North may stir up tensions around joint military exercises the United States and South Korea start next week.

Yoon, a conservative who took office in May, said North Korea’s denuclearization would be key for peace in the region and the world. If North Korea halts its nuclear weapons development and genuinely commits to a process of denuclearization, the South will respond with huge economic rewards that would be provided in phases, Yoon said.

Yoon’s proposal wasn’t meaningfully different from previous South Korean offers that have already been rejected by North Korea, which has been accelerating its efforts to expand its nuclear weapons and ballistic missiles program leader Kim Jong Un sees as his strongest guarantee of survival.

“We will implement a large-scale program to provide food, providing assistance for establishing infrastructure for the production, transmission and distribution of electrical power, and carry out projects to modernize ports and airports to facilitate trade,” Yoon said.

“We will also help improve North Korea’s agricultural production, provide assistance to modernize its hospitals and medical infrastructure, and carry out initiatives to allow for international investment and financial support,” he added, insisting that such programs would “significantly” improve North Korean lives.

Inter-Korean ties have deteriorated amid a stalemate in larger nuclear negotiations between Washington and Pyongyang, which derailed in early 2019 over disagreements in exchanging a release of crippling U.S.-led sanctions against the North and the North’s disarmament steps.

North Korea has ramped up its testing activity in 2022, launching more than 30 ballistic missiles so far, including its first demonstrations of intercontinental ballistic missiles since 2017. Experts say Kim is intent on exploiting a favorable environment to push forward his weapons program, with the U.N. Security Council divided and effectively paralyzed over Russia’s war on Ukraine.

North Korea’s unusually fast pace in weapons demonstrations also underscore brinkmanship aimed at forcing Washington to accept the idea of North Korea as a nuclear power and negotiating badly economic benefits and security concessions from a position of strength, experts say. The U.S. and South Korean governments have also said the North is gearing up to conduct its first nuclear test since September 2017, when it claimed to have detonated a nuclear warhead designed for its ICBMs.

In face of growing North Korean threats, Yoon has vowed to bolster South Korea’s defense in conjunction with its alliance with the United States and also strengthen security ties with Japan, which is also alarmed by the North’s nuclear and ballistic weapons program.

South Korea’s relations with Japan declined to post-war lows over the past several years as the countries allowed their grievances over history to extend to other areas including trade and military cooperation.

While Yoon has called for future-oriented cooperation with Japan, history may continue to pose an obstacle to relations. The countries have struggled to negotiate a solution after Japanese companies rejected South Korean court rulings in recent years to compensate South Koreans who were subject to wartime industrial slavery, an issue that could cause further diplomatic rupture if it results in the forced sales of the companies’ local assets.

“In the past, we had to unshackle ourselves from Imperial Japan’s political control and defend our freedom. Today, Japan is our partner as we face common threats that challenge the freedom of global citizens,” Yoon said. “When South Korea and Japan move toward a common future and when the mission of our times align, based on our shared universal values, it will also help us solve the historical problems that exist between our two countries.”

While Washington has said it would push for additional sanctions if North Korea conducts another nuclear test, the prospects for meaningful punitive measures are unclear. China and Russia recently vetoed U.S.-sponsored resolutions at the U.N. Security Council that would have increased sanctions on the North over its ballistic missile testing this year.

North Korea’s state media said Monday that Kim exchanged messages with Russian President Vladimir Putin and celebrated their strengthening ties.

Kim said the countries’ relations were forged by the Soviet contributions in Japan’s World War II defeat and that they were strengthening their “strategic and tactical cooperation and support and solidarity” in the face of enemies’ military threats. Putin said closer ties between the countries would help bring stability to the region, the North’s official Korean Central News Agency said.

North Korea has repeatedly blamed the United States for the crisis in Ukraine, claiming the West’s “hegemonic policy” justified Russia’s offensive in Ukraine to protect itself.

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Business

U.S. stocks turn lower after weak consumer-confidence reading

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U.S. stocks gave up early gains to turn lower Tuesday after a consumer-confidence reading came in weaker than expected.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -0.69%
    was down 185 points, or 0.6%, at 31,253.
  • The S&P 500
    SPX,
    -1.03%
    fell 38 points, or 1%, to 3,862.
  • The Nasdaq Composite
    COMP,
    -1.79%
    dropped 202 points, or 1.8%, to 11,323.

On Monday, major indexes drifted to a modestly lower close. The S&P 500, which has slid into a bear market, is down 18% year to date,

What’s driving markets

The Conference Board’s consumer-confidence index dropped in June to a 16-month low of 98.7, as Americans grew more worried about high gas and food prices and the health of the economy. Economists polled by The Wall Street Journal had forecast the index to drop to 100 from a revised 103.2 in May.

“The persistent weakness in confidence surveys suggests a recessionary environment can become self-fulfilling,” said John Lynch, chief investment officer for Comerica Wealth Management, in emailed comments.

“While cash on household balance sheets and two job openings for every job seeker are supportive of economic activity, inflation has pressured sentiment and can weigh on consumption and investment decisions,” Lynch said. “For equity investors, this has been reflected in the persistent leadership of defensives relative to cyclicals in the first half of the year.”

Global equities, particularly travel stocks, got a lift early Tuesday, with analysts tying support to moves by the Chinese government, which said it would shorten the quarantine time for international travelers and those who have come into close contact with COVID-19 patients to 10 days from 21 days.

Beijing will also loosen its testing requirements for people in quarantine.

Also, six of the biggest U.S. banks said they have enough capital to either maintain or hike their dividends to shareholders after setting enough aside to handle the most extreme economic conditions expected in the coming year.

Wells Fargo & Co.
WFC,
+0.92%
and Goldman Sachs Group Inc.
GS,
+0.41%
both increased their payouts by 20%, while Morgan Stanley
MS,
+2.03%
delivered an 11% rise. Bank of America Corp.
BAC,
+0.79%
increased its dividend by 5%, while Citigroup Inc.
C,
-0.83%
and JPMorgan Chase & Co.
JPM,
+0.38%
held their dividend flat.

Need to Know: Oaktree’s Howard Marks is finding bargains. ‘I am starting to behave aggressively,’ he says

U.S. stocks were weighed down on Monday after a rise in bond yields. Analysts had been anticipating that month and quarter end rebalancing of portfolios would be supportive of stocks this week, though doubts over the durability of the bounce off recent lows remain.

“It is difficult to draw any concrete conclusions so close to quarter end, when rebalancing flows are muddying the waters,” said Marios Hadjikyriacos, senior investment analyst at XM.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y was up 1 basis point at 3.205%. Yields and debt prices move opposite each other.

New York Fed President John Williams, in a television interview, said he expected the U.S. economy would see a slowdown but not a recession as the central bank aggressively tightens monetary policy in an effort to rein in inflation. Williams said he expected policy makers to debate whether to hike rates by another 50 or 75 basis points when they meet in July, after delivering a 75 basis point increase this month — the largest since 1994.

Data showed the U.S. trade deficit in goods narrowed by 2.2% in May to $104.3 billion.

The S&P CoreLogic Case-Shiller 20-city index posted a 21.2% year-over-year gain in April, up slightly from 21.1% in the previous month. In April, the 20-month index rose a seasonally adjusted 2.3%. A separate report from the Federal Housing Finance Agency showed a 1.6% monthly gain. And over the last year, the FHFA index was up 18.8%.

Companies in focus
  • Nike Inc. NKE shares fell 5.2% after the apparel maker beat earnings estimates but was cautious on margins and on China in particular. But Chinese stocks advanced after a loosening of quarantine requirements in the world’s second-largest economy.
  • JetBlue Airways Corp.
    JBLU,
    +0.63%
    once again raised its offer for discount carrier Spirit Airways Inc.
    SAVE,
    +2.13%
    as it attempts to outbid rival Frontier Group Holdings Inc.
    ULCC,
    +2.99%.
    JetBlue shares rose 0.5%, Spirit shares gained 1.4% and Frontier shares were up 2.2% amid a positive tone across the airline sector. The popular U.S. Global Jets ETF
    JETS,
    +1.10%
    rose 1.6%.
Other assets
  • The ICE U.S. Dollar Index
    DXY,
    +0.47%,
    a measure of the currency against a basket of six major rivals, rose 0.5%.
  • Bitcoin
    BTCUSD,
    -1.03%
    was down 0.6% nea5 $20,600.
  • Oil futures rose, with the U.S. benchmark
    CL.1,
    +1.92%
    up 1.1% near $111 a barrel. Gold futures
    GC00,
    -0.15%
    were off 0.1% near $1,822 an ounce.
  • The Stoxx Europe 600
    SXXP,
    +0.27%
    rose 0.7%, while London’s FTSE 100
    UKX,
    +0.90%
    advanced 1.3%.
  • The Shanghai Composite
    SHCOMP,
    +0.89%
    and Hong Kong’s Hang Seng Index
    HSI,
    +0.85%
    each ended 0.9% higher, while Japan’s Nikkei 225
    NIK,
    +0.66%
    rose 0.7%.

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Business

U.S. stocks struggle for direction as opening gains fizzle despite strong durables data

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U.S. stocks struggled for direction Monday afternoon, trading near unchanged, as investors weighed stronger-than-expected data on durable-goods orders against expectations for a slowing economy that could limit the magnitude of Federal Reserve rate increases.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    +0.09%
    was almost unchanged at 31,503.
  • The S&P 500
    SPX,
    +0.01%
    was down 4 points, or 0.1%, at 3,907.
  • The Nasdaq Composite
    COMP,
    -0.35%
    shed 71 points, or 0.6%, at 11,537.

Last week, the S&P 500 jumped 6% to snap a three-week losing run. The Dow Jones Industrial Average rose 5% and the tech-heavy Nasdaq Composite gained 7%.

What’s driving markets

Stocks struggled to hang on to gains after data showed U.S. durable-goods orders rose by 0.7% in May, versus forecasts for a 0.2% rise, and pending home sales rebounded last month, reversing a six-month decline. Investors were caught between recession and inflation fears.

“Stocks can’t win right now, either the economic data softens and the economy is much weaker than we thought or robust readings pave the way for the Fed to be more aggressive with their inflation fight,” said Edward Moya, senior market analyst at Oanda, in a note.

Stocks had bounced last week in a move analysts credited to expectations a slowing economy could see the Federal Reserve hike rates less aggressively than previously expected. Fed Chairman Jerome Powell warned lawmakers that achieving a so-called soft landing for the economy as the Fed tightens interest rates would be “very challenging.”

JPMorgan quantitative strategist Marko Kolanovic published a note saying the market could rise 7% this week, due to the need for portfolios to rebalance as the month, quarter and first-half closes. That effect already played out near the end of the first quarter, and near the end of May.

“The S&P 500 is nearly 8% up from its lows at the start of the month and rallied 3% on Friday,” according to analysts at ING, in a Monday note. “Helping the rally has no doubt been last week’s repricing of tightening cycles around the world where 25-50 basis points of expected tightening were removed from some money market curves in just a few days. Driving that pricing seemed to be the much broader discussion — including from Federal Reserve Chair Jerome Powell — over the risks of recession.”

Strategists at Credit Suisse say bond yields may have seen their peak, particularly for Treasury-inflation protected securities, which in turn means the dollar
DXY,
-0.34%
 is close to its summit. They say their lead indicators are consistent with 0% GDP growth, as evidenced by the collapse in housing affordability, the weakness of corporate confidence and the weakness in the employment gauge of the Institute for Supply Management manufacturing index.

Group of Seven economic powers are meeting in Germany where they expect to announce an agreement on a price cap on Russian oil.

Companies in focus
  • Frontier Airlines parent Frontier Group Holdings Inc.
    ULCC,
    -11.01%
    issued a letter to Spirit Airlines Inc.
    SAVE,
    -7.55%
    shareholders, urging them to support the air carriers’ agreed upon merger deal. In the letter, Frontier Chairman William Franke and Chief Executive Barry Biffle said the recently amended Frontier-Spirit deal offers Spirit shareholders value “well in excess” of JetBlue Airways Corp.’s
    JBLU,
    +1.86%
    “illusory proposal, which lacks any realistic likelihood of obtaining regulatory approval.” Frontier shares fell more than10%, while Spirit shares dropped 8% and JetBlue shares gained 1.3%.
Other assets
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.186%
    rose 4 basis points to 3.166%. Yields and debt prices move opposite each other.
  • The ICE U.S. Dollar Index
    DXY,
    -0.34%
    edged down 0.4%.
  • Bitcoin
    BTCUSD,
    -3.09%
    fell 3.4% to trade near $20,675.
  • Oil futures traded higher in choppy trade, with the U.S. benchmark
    CL.1,
    +2.24%
    up 1.3% near $109.04 a barrel. Gold
    GC00,
    -0.21%
    was off 0.2% below $1,827 an ounce.
  • The Stoxx Europe 600
    SXXP,
    +0.52%
    finished 0.5% higher, while London’s FTSE 100
    UKX,
    +0.69%
    gained 0.7%.
  • The Shanghai Composite
    SHCOMP,
    +0.88%
    ended 0.9% higher, while the Hang Seng Index
    HSI,
    +2.35%
    jumped 2.4% and Japan’s Nikkei 225
    NIK,
    +1.43%
    rose 1.4%.

— Steve Goldstein contributed to this article.

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