Fed Chair Jerome Powell’s press conference on Wednesday set off a major rally.
JIM WATSON/AFP via Getty Images
Up big one day, down hard the next.
Stocks tumbled Thursday, giving back the gains from a spectacular rally touched off by Fed Chairman Jerome Powell after the central bank settled on a half-point rate hike and a timeline for shrinking its balance sheet. China and its economic concerns were a drag on the market, too.
The Dow Jones Industrial Average retreated 1,063 points, or 3.1%. The S&P 500 dropped 3.6%, and the Nasdaq Composite declined 5%. The last time the Nasdaq declined more than 5% was June 11, 2020.
On Wednesday, the S&P 500 and Dow both rose more than 2%, posting their largest gains since 2020, while the Nasdaq gained just over 3%.
For starters, “we shouldn’t have gone up 2% yesterday on the news,” said Tom Essaye, founder of Sevens Report Research.
The Fed said it would hike the benchmark lending rate by 50 basis points, or hundredths of a percentage point, rather than the standard 25 basis points. Markets had expected the move; the Fed has been adamant about reducing high inflation. But the Fed also said it isn’t considering a more aggressive 75 basis-points hike, which was a relief to markets. The central bank also said it would begin reducing its bondholdings.
“Chair Powell said exactly what markets needed to hear,” wrote Keith Lerner, co-chief investment officer at Truist. “He restored the notion that the Fed would maintain maximum flexibility rather than blindly hiking rates.”
But Wall Street did an about-face Thursday. Markets are still trying to figure out just how much damage higher interest rates will do to the economy and earnings.
Besides the Fed, investors are jittery about a variety of other issues—from the Russia-Ukraine war to lockdowns in China.
Concerns about the Chinese economy showed up in full force Thursday. China’s Caixin purchasing managers’ index, a gauge of economic activity, read 36.2 for April, down from 42 in March. A reading below 50 indicates economic activity declined.
One concern is that if companies around the globe can’t access enough supply from China to meet demand, economic activity and sales outside China will decline. The other concern is that companie’ costs will keep rising, putting downward pressure on profit margins.
“China’s PMI this morning was horrific,” said Essaye. “That underscores that the Chinese economy is a huge drag on global growth right now. It’s a risk to keep inflation high.”
A new survey shows that sentiment among individual investors is low. Only 16% are bullish on the stock market, the lowest reading since at least 2015, according to Truist.
That low confidence in the market is also seen in price trends. All three major indexes are still trading at levels below their 200-day moving averages, which means investors still aren’t confident enough to buy stocks at prices consistent with their longer-term trends.
Technology stocks were getting hit the hardest, with the the bond market inflicting the pain. The 10-year Treasury yield rose to 3.05%, which marks a new pandemic-era closing high. Higher yields on long-dated bonds make future profits less valuable in current terms, and many fast-growing tech companies are valued on the basis that they’ll churn out a chunk of their profits many years in the future.
“Given the Nasdaq has some correlation to long bonds as a long duration asset, the NASDAQ was the first to falter,” wrote NatAlliance Securities’ Andrew Brenner.
Apple (ticker: AAPL), which cited the suspension of business in China as a sales headwind for the current quarter, saw its stock fall 5.6%. Microsoft (MSFT) stock fell 4.4%.
There’s one silver lining, though, that the market could hang its hat on. The S&P 500 is still holding firm above its Friday closing lows indicating that buyers step in around those levels. At least market participants know that the Fed-related risk isn’t getting any worse for now.
Overall, “at the end of the day, it feels like we’re getting to a [market] bottom,” said Chris Harvey, chief U.S. equity strategist at Wells Fargo.
Next on the market’s radar is the Bureau of Labor Statistics’ jobs report, out Friday. Economists are looking for 400,000 jobs to have been added in April, which would be a decrease from March’s result of 431,000. Any result that is too far above expectations could indicate that high inflation is likely to stick around long enough for the Fed to lift interest rates more aggressively than it said it would this week.
For the moment, it doesn’t necessarily look like the employment numbers will crush expectations. Jobless claims for the past week came in at 200,000, versus expectations for 182,000.
Economic worries are also prompting investors to flock into haven assets like the U.S. dollar. The U.S. Dollar Index (DXY) rose 0.9%, to near a multi-decade high.
Here are six stocks that were on the move Thursday:
JD.com (ticker: JD) and Nio (NIO) slumped 6% and 15%, respectively. They were among more than 80 U.S.-listed Chinese companies added to a Securities and Exchange Commission list for possible delisting if they don’t increase transparency with their financial accounting.
Shopify (SHOP) stock dropped 15% after the company reported a profit of 20 cents a share, missing estimates of 64 cents a share, on sales of $1.2 billion, in line with estimates.
Wayfair (W) stock fell 26% after the company reported a loss of $1.96 a share, worse than estimates of $1.56 a share, on sales of $3 billion, above expectations for $2.99 billion.
EBay (EBAY) stock dropped 12%. The company reported a profit of $1.05 a share, beating estimates of $1.03 a share, on sales of $2.48 billion, above expectations for $2.46 billion.
Etsy (ETSY) stock fell 17%. Its profit of 60 cents a share was in line with estimates, while sales were $579 million, above expectations for $575 million.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com
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