New York – It’s been a rollercoaster week for the stock market, but Thursday brought a sigh of relief to investors as major indexes rebounded from the previous day’s steep losses.
The Dow Jones Industrial Average rose 0.9%, recovering some of Wednesday’s sharp decline. The S&P 500 bounced back 1% and the tech-heavy Nasdaq Composite jumped 1.3%. It was a much-needed reprieve after the Nasdaq entered correction territory earlier this week, down more than 10% from its November high.
Analysts attributed Thursday’s gains to bargain hunting, as investors scooped up beaten-down stocks. Tech darlings like Apple, Microsoft and Google parent Alphabet reclaimed lost ground. Apple edged up despite halting sales of some Apple Watch models due to a patent dispute. Microsoft continues hugging the 21-day moving average. Google crossed back above a recent buy point.
But market watchers cautioned against celebrating too soon. The overall market environment remains challenging amid worries over stubbornly high inflation, rising interest rates and signs of slowing economic growth.
“This market doesn’t want to pull back, rebounding despite Wednesday’s sell-off,” said Ed Carson, analyst at Investor’s Business Daily. “But it’s hard to take too much meaning from Thursday’s action. Perhaps the market will pause or pullback modestly over several days. That could let the indexes catch their breath.”
Wall Street’s focus now turns to key economic data on tap Friday, including the Fed’s preferred measure of inflation, the PCE price index. Any signs of easing price pressures could boost stocks. But a hotter-than-expected reading could revive recessionary fears that dragged markets lower this week.
The Latest on Inflation
November’s PCE price index will be released Friday morning along with other data that could offer fresh clues on the direction of inflation and the economy.
Economists predict the PCE index dipped 0.1% for the month, with the annual rate ticking down to 6.1%. The core PCE index, which excludes volatile food and energy costs, is expected to rise 0.2% and 5.6% from a year ago.
The PCE data comes on the heels of this month’s Consumer Price Index report showing inflation cooling but still uncomfortably high. The Federal Reserve responded last week with another large interest rate hike, vowing to keep tightening policy until inflation falls toward its 2% target.
With the Fed seemingly locked into an aggressive tightening campaign, there are growing concerns it could tip the economy into recession next year. The housing market is already slowing sharply in response to higher mortgage rates.
Nike’s Warning Rattles Markets
Stocks wavered in premarket trading Friday after Nike reported weakening demand in North America and slashed its revenue outlook late Thursday. The sports apparel giant plunged over 10%, set to open at its lowest point since June 2021.
Nike’s warning sent ripples through the retail sector, with footwear stocks like Deckers, Crocs and On Holding also tumbling. It’s the latest evidence of inflation taking a toll on consumer spending, a pillar of the economy.
Target, Best Buy, FedEx and other companies catering to households have also warned in recent months of shoppers cutting back on discretionary items. High prices for food, rent, gasoline and other essentials are forcing many low- and middle-income consumers to tighten their belts.
“This will certainly feed into recession worries,” said Marshall Steeves, economist at BNP Paribas. “When even ‘aspirational’ brands like Nike start seeing demand destruction, it’s clear households are becoming more careful with their wallets.”
The Fed’s rate hikes have lifted borrowing costs across the economy in the hopes of dampening demand and relieving price pressures. But the sharp slowdown raises risks of the economy contracting next year.
Holiday Shopping Off to Slow Start
Black Friday sales rose only modestly this year after surging in 2021, according to data from Mastercard SpendingPulse. And early reads on this month point to further softening.
Retail chains rely on the holiday season for a significant chunk of their annual sales and profits. But higher prices on everything from gifts to holiday meals are deterring many shoppers still struggling with elevated inflation.
“We’re seeing consumers very focused on savings and making sure they get good deals,” said Michelle Meyer, U.S. economist at the Mastercard Economics Institute. “It’s going to be a very promotional holiday season.”
Chains like Target and Macy’s are marking down excess inventory that got caught up in snarled supply chains last year. But it may not be enough to entice cash-strapped buyers.
Online spending also cooled off in November after spiking earlier in the pandemic. Soaring energy bills could discourage families from traveling or visiting loved ones this holiday season.
All told, Moody’s Analytics predicts real retail sales will essentially stagnate in November and December compared with a year ago. That would make it the worst holiday season since the Great Recession in 2008.
Housing Market Grinds to a Halt
Just as consumers are pulling back, the housing sector continues deteriorating in the face of surging mortgage rates.
The average rate on a 30-year fixed mortgage topped 6.2% last week for the first time since 2008, more than double the 3% prevailing at the start of 2022.
The rate spike has crushed demand, especially among first-time homebuyers unable to afford monthly payments. New home sales likely ticked up slightly in November but remain near their lowest point in over two years.
Homebuilder sentiment has also plunged to recession-era lows. Builders are offering incentives like free upgrades to attract wary buyers. But many are still walking away due to unaffordable financing costs.
“Higher rates have rapidly weakened demand,” said economist Odeta Kushi at First American Financial Corp. She expects the housing downturn has even further to go.
With supply still extremely tight, home prices have so far avoided the plunge seen in prior downturns. But with sales drying up, builders are likely to ramp up discounting in the months ahead.
The brokerage Redfin said earlier this month that home prices posted their first yearly decline since 2012. More than a quarter of sellers in November dropped their asking price.
Bumpy Road Ahead
Despite Thursday’s reprieve, analysts stress it’s still risky times for investors. September’s hot inflation report triggered heavy selling that carried through much of the fall. Wednesday’s Federal Reserve meeting kept up the pressure.
Ongoing volatility seems likely with uncertainty still exceptionally high on inflation and the economic outlook. Any signs of an economy already in recession could bring another wave of heavy selling.
For now, major indexes remain above their October lows, suggesting the long bull market retains some life. But the bottom could still fall out, especially if companies continue warning of demand slowdowns.
Patience and prudence remain prudent until more concrete signs emerge of inflation easing substantially. The Fed may need to cause an economic contraction to tame prices.
But markets are forward looking. Stocks could mount a renewed rally long before inflation returns to normal levels, anticipating light at the end of the tunnel. That still seems many months off, but picking solid companies poised to thrive again when conditions improve can pay off handsomely.