Wednesday, February 28, 2024

Market Volatility: Dow Plummets Over 100 Points, S&P 500 and Nasdaq See Steepest Monthly Decline in 2023

HomeStock-MarketMarket Volatility: Dow Plummets Over 100 Points, S&P 500 and Nasdaq See...

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U.S. stocks slipped on Friday, giving back early gains as investors tracked the latest developments around a potential government shutdown. The pullback capped a volatile quarter that saw sharp losses in major indexes amid rising recession fears.

The Dow Jones Industrial Average shed 0.5%, ending near 33,508. The S&P 500 dipped 0.3% to finish around 4,288. The tech-heavy Nasdaq Composite managed a slight 0.1% advance to close at 13,219.

For the week, the Dow and S&P 500 fell 1.3% and 0.7%, respectively. The Nasdaq ended just above break-even, up 0.06%.

It was a more pronounced decline for the quarter overall. The Dow dropped 2.7%, the S&P 500 lost 3.7%, and the Nasdaq tumbled 4.1% in the July to September period. September also marked the worst month of 2022 so far for the S&P 500 and Nasdaq, plunging 4.9% and 5.8%.

Markets Digested Mixed Inflation Data

Stocks initially climbed on the back of a benign inflation report before erasing gains. The Federal Reserve’s preferred personal consumption expenditure price index rose 0.1% in August, below expectations. The core PCE index, excluding food and energy, increased 0.2%.

On an annual basis, headline PCE inflation slowed to 6.2% from 6.4% while core inflation edged down to 4.9% from 4.7%. The data provides some evidence price pressures may be near peaking.

But analysts cautioned it was too soon for the Fed to deviate from its aggressive tightening campaign until clear, sustained declines emerge. Central bank officials have signaled they will continue hiking rates into early 2023 to tame inflation.

Focus Shifted to Potential Shutdown

The lift in markets earlier faded as concerns grew over a potential government shutdown. Congressional negotiations on a stopgap spending bill stretched down to the wire ahead of a Saturday deadline.

House Republican leaders failed to rally sufficient votes for their preferred plan on Friday. Without an agreement by midnight, parts of the federal government will begin shutting down.

While past shutdowns have caused only temporary economic disruption, the political standoff contributes to uncertainty in markets already on edge over recession risks.

Fed Remains Hawkish Despite Softer Inflation

New York Fed President John Williams reiterated on Friday that rates will need to stay elevated “for some time” until inflation shows more meaningful improvement. He described price pressures as “still too high” despite moderating slightly.

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Williams also said tighter policy will likely slow growth and lift unemployment next year. The comments reinforce the Fed’s resolute stance on crushing inflation through restrictive policy, even at the cost of an economic downturn.

Rate Hike Bets Still Center Around 75 Basis Points

Markets continue to expect another large 0.75 percentage point interest rate increase at the Fed’s November meeting. However, the door remains open for a dial back to a 0.5 point hike in December.

The Fed lifted rates by three-quarters of a point at its last three meetings. The policy rate now sits in a target range of 3% to 3.25%, up from near zero in March. The rapid tightening has roiled markets and strained business and consumer demand.

Further out, investors are split on whether the Fed will ultimately hike to around 4.5% or 5% next year. The path will depend crucially on how quickly inflation yields to policy tightening.

Nasdaq Outperforms with Help from Tech Stocks

The Nasdaq Composite managed a slight gain on Friday thanks to relative strength in technology stocks. Chipmaker Micron Technology surged over 4% while software firm Trimble rallied 3%.

Nvidia also outperformed after Citi Research predicted its next-generation graphics card could drive upside. The firm expects the new GPU will be a major catalyst for Nvidia’s sales and profit margins.

Meanwhile, Apple and Amazon saw more modest gains. The limited lift in big tech giants wasn’t enough to pull the broader market higher by the close.

Consumer Discretionary Stocks Aid S&P 500

Like the Nasdaq, the S&P 500 found some support from consumer discretionary stocks. Nike spiked 7% following its earnings, making it among the best performers. Fashion company VF Corp added 5%.

But the gains were counterbalanced by declines elsewhere. Real estate and healthcare fell despite a largely upward day. Losses steepened in the final hour of trading to sink the S&P 500 into negative territory.

Communications services and materials were additional weak spots, falling over 1% each. The economically sensitive sector remains pressured by demand concerns.

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Dow Slips as Recession Fear Drives Defensives

The Dow Jones reversed its early gains, led down by losses in Travelers Companies, Boeing, and Caterpillar. The insurance, aerospace and machinery stocks are sensitive to the economic cycle.

As recession worries swirl, the Dow has been weighed down by its cyclical exposure. More defensive sectors like healthcare and consumer staples have outperformed this quarter within the Dow.

Chevron was another drag on the price-weighted index as oil prices extended their retreat. ConocoPhillips and ExxonMobil also slipped over 1% each amid the risk-off mood.

Profit Taking Continues After Equity Rally

Part of Friday’s fade may represent continued profit-taking after the powerful relief rally earlier in the week. The Dow jumped over 1,500 points on Monday and Tuesday, recovering some declines amid increasingly oversold conditions.

The CBOE Volatility Index, or VIX, spiked above 30 last week as equity losses mounted. Its retreat back below 25 this week aligns with the short-term bounce. But lingering uncertainties could spur volatility to pick back up.

Friday marked the end of quarter-end rebalancing, which may have also influenced trading flows during the week. Position adjustments by funds and institutions tend to heighten volatility.

Market Remains Fixated on Recession Risk

Despite recovering some steep losses in recent sessions, stocks still ended deeply in the red for September and the third quarter overall. Lingering recession fears, aggressive Fed policy, and global growth concerns have markets on edge.

According to the latest AAII sentiment survey, bearish sentiment surged to 60.2%, its highest level since 2009. The panic mindset reflects exceptionally weak investor psychology amid the sea of uncertainties.

Market volatility is likely to remain elevated as investors grapple with the crosscurrents. Hawkish Fed messaging, negative economic data, and corporate profit warnings could easily spur renewed waves of selling.
Upside also appears limited until evidence of slowing inflation clearly emerges.

Dollar Tree Plunges as Profits Fall Short

Dollar Tree tumbled over 7% Friday after the discount retailer cut its full-year profit forecast. It joins a growing list of companies impacted by shifting consumer demand.

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Shoppers are pulling back on discretionary purchases amid high inflation and seek more value for everyday essentials. Results from Dollar Tree highlight the broader pressure on low-income consumers.

Macy’s and discount peer Five Below also warned this week of rising inventories and slowing sales. And Nike’s strong quarterly results stood out amid a mixed batch of retail earnings.

FedEx Gains on Optimistic HSBC Call

FedEx bucked the market’s slide, rising 1.8%, after HSBC initiated coverage with a Buy rating. Analysts see the delivery firm narrowing the profitability gap with rival UPS through network improvements.

According to HSBC, FedEx is better positioned relative to peers because of its transformation initiatives. The positive call outlines the long-term tailwinds supporting transportation and logistics firms.

AllianceBernstein was also among outperformers, added over 2%. Bank of America predicts its fixed income assets will benefit as investors re-allocate to bonds. Both stocks showed resilience on a downbeat day.

Market Eyes Path After Brutal Quarter

With the quarter wrapping up, attention turns to the final months of 2022. While equities showed some recovery signs this week, many analysts expect further turbulence ahead.

Ongoing Fed hawkishness, risks of policy overtightening, persistent inflation, and slowing growth all cloud the outlook. Even with heavy losses in recent months, stocks may face additional capitulation if conditions deteriorate further.

Nonetheless, markets have priced in a degree of recession risk. And any evidence of moderating price pressures could drive an upside relief rally. selectivity will be key, with investors differentiating quality stocks from challenged businesses.

Overall, Friday’s lackluster close capped a painful quarter for equities. The Dow and S&P 500 ended deep in negative territory, reversing initial optimism. While the Nasdaq rebounded slightly, tech stocks generally underperformed. With risks tilted to the downside and volatility elevated, the path forward looks treacherous.

The looming government shutdown threatens to aggravate market unease as the fourth quarter kicks off. While equities still appear vulnerable, patient investors can look for opportunities to capitalize on sharp reversals. But the bottoming process may take time absent a meaningful shift in the Fed or inflation outlook.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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