Topline
The stock market tumbled on Thursday after strong economic data fueled concerns the Federal Reserve may push interest rates higher than previously expected in order to help cool inflation—reversing a strong Wednesday rally and pushing major indexes deeper into one-month lows.
Growing signs suggest the Fed may have much more work left to cool the economy and tame inflation.
Key Facts
The Dow Jones Industrial Average shed 725 points, or 2.2%, falling to 32,650 by 1 p.m. ET Thursday, while the S&P 500 and tech-heavy Nasdaq similarly fell to one-month lows, collapsing 2.7% and 3.5%, respectively.
Losses piled on throughout the day after morning data showing initial jobless claims rose only slightly to 216,000 last week (lower than economists expected), while gross domestic product growth finished the third quarter at 3.2%—higher than the 2.9% economists projected.
In emailed comments, Oanda analyst Ed Moya said the data supports the Fed’s case for ongoing rate increases in the new year; some investors hope the last hike could come at the next meeting in February, but if data keeps coming in hot, Moya says a March hike could be on the table.
Andrew Viteritti, an analyst at the Economist Intelligence Unit, said the stronger-than-expected readings present “new risks” to the overall economy, arguing the Fed’s aggressive response to lingering inflation could prolong a potential recession next year.
Also fueling bearish sentiment, Micron Technology, the nation’s largest chipmaker, warned an inventory glut will make it difficult for the firm to be profitable and announced about 10% of jobs will be cut next year, according to its latest earnings report; shares fell 5% on Thursday.
Key Background
Stocks have struggled since the Fed started raising rates in March, with the S&P down 20% this year after surging nearly 27% in 2021. The Nasdaq, meanwhile, has collapsed 35%. According to Goldman Sachs, 2022 is likely to end up as the sixth-most volatile year since the Great Depression. “Markets are largely abandoning hope” that easing price pressures will convince central bank officials their job in taming inflation is done, says analyst Adam Crisafulli of Vital Knowledge Media. He notes the pessimism will likely continue over the coming weeks, with the next consumer price index report not slated for release until January 12.
What To Watch For
The Fed’s next policy meeting concludes on February 1. Viteritti expects the Fed’s hikes will ultimately bring interest rates up to as much as 5%, which would be the highest level since the Great Recession.
Tangent
Consumer prices rose 7.1% on an annual basis in November—hitting the lowest level since December 2021, but still more than three times the Fed’s historic 2% inflation target.
Further Reading
Is The Economy On The Brink Of Recession? Here’s Why Strong GDP Data May Not Tell The Whole Story (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/12/22/dow-plunges-over-700-points-as-new-risks-fuel-recession-fears/