Strong Economic Data Spark Midday Sell-Off and Late Comeback

This December blizzard keeps on howling, and we’re not talking about the snowstorm sweeping across much of the country right now. The one on Wall Street is doing plenty of damage of its own.

Major stock indexes skidded Thursday to their lowest intraday levels since early November following more evidence that the Federal Reserve has work to do cooling off the economy. A sizzling Q3 Gross Domestic Product (GDP) report and lower-than-expected jobless claims sparked the sell-off—though the S&P 500 (SPX) did manage to claw back in the last hour from its worst levels of the day and close above what some see as technical support at 3,800.

Final Q3 GDP rose 3.2%, the government reported, up from its previous estimate of 2.9%. In normal times, this would be great news, but now it simply raises concerns that the Fed might have to tighten rates even more to settle the economy. The GDP deflator, which measures changes in the price of goods and services, was 4.4%, above Wall Street’s 4.3% consensus.

Initial jobless claims for the week were near the low end of the recent range at 216,000. Continuing claims didn’t budge.

The labor market isn’t cooling, and inflation and growth are both higher. As we noted earlier today, this isn’t the kind of data the equity market wanted. It also didn’t help to see the final two major earnings reports of the year—from semiconductor chipmaker Micron (NASDAQ:MU) and used-vehicle retailer CarMax (NYSE:KMX)—disappoint.

Fed Fears Triggered Again

Stocks slipped in the open and never regained their footing. Attempts to stabilize at technical support levels of 3,870, 3,850, and 3,835 only offered momentary relief.

The sellers are back after sizzling reports on GDP and initial jobless claims renewed fears that the Fed has more work to do. Tomorrow’s PCE Inflation Data is starting to look even more important.

While the upwardly revised GDP data was what started it all off, hedge fund manager David Tepper told CNBC Thursday morning that everyone should believe the Fed when it says it’s committed to tightening—and that was the final blow. Once Tepper spoke his bearish words, they quickly ricocheted across Wall Street.

The market has been trying to convince itself that the Fed will let up in the face of an economic slowdown despite repeated hawkish statements from Fed Chairman Jerome Powell and other Fed officials. As we noted yesterday, the market continues to price in a terminal federal funds rate for 2023 below 5%, despite the Fed clearly saying it plans to raise rates to 5% to 5.25%. Thursday might represent some remaining optimists finally throwing in the towel.

KMX also announced it would cut its share buybacks, which in and of itself isn’t news, but it could drive concerns that there may be more to follow. Buybacks are the easiest investor incentive companies can pull off the table, but the KMX announcement might spook investors who rely on dividends as well. Dividend cuts often occur in a slowing economy and can make stocks seem less attractive, especially in an environment like this where investors can find decent yields in fixed income and even cash.

For those seeking optimism, volumes are still relatively light, which hints that there isn’t broad conviction behind this sell-off. Still, there was a lot of damage done on the charts today that could be hard to immediately undo.

VIX, Yields Rise; Investors Brace for Data

The CBOE Volatility Index, which had dropped briefly below 20 earlier this week, zoomed up above 24 at one point Thursday before pulling back to below 23. The long-term average is around 20, and highs this year were above 35. As long as the VIX remains in the low 20s, there’s not much indication of wild moves ahead in the market for the week between Christmas and New Year’s, but the VIX alone doesn’t guarantee that.

Even as the VIX popped Thursday, the closely watched 10-year Treasury yield (TNX) stayed elevated at 3.67%, about 27 basis points above its December lows. Strength in the TNX could suggest some investors are worried about the Fed getting more hawkish. The 2-year Treasury yield, which is more closely attuned to near-term Fed moves, climbed 3 basis points to 4.26%, maintaining about a 60-point premium to the 10-year yield.

That inverse relationship had narrowed earlier this week with the rise in the TNX, but it’s still at historically high levels often associated in the past with recessions.

Crude Oil WTI Futures (/CL) stepped back slightly as stocks fell but remained above $78 per barrel late in the day, up sharply from this month’s lows near $70. Higher crude could make the Fed’s inflation-fighting job more difficult with energy prices potentially on the rise again.

Today’s GDP report was more of a backward glance to last summer. Investors who want a better sense of the current economic situation will be glued to their screens tomorrow before the opening bell for November Personal Consumption Expenditures (PCE) prices and spending.

• The PCE inflation reading is one that the Fed has said it pays close attention to, and Wall Street’s consensus is now for a 0.2% increase, according to research firm Briefing.com. PCE rose 0.3% in October and 6% year over year. Core PCE prices, which don’t include food and energy, are expected to increase to 0.3% in November after a 0.2% gain in October.
• If PCE and core PCE come in as expected or below consensus, it likely will reinforce investor thinking that inflation is starting to fade. If they’re higher, the sound you hear on Wall Street might be “Timber!” as inflation and rate fears likely grab center stage. Get ready for possible volatility around the time those numbers come out at 8:30 a.m. ET tomorrow.
• Personal spending, another data point out at 8:30 a.m. tomorrow, is expected to rise just 0.1% in November, down sharply from 0.8% in October and conceivably a sign that inflation and interest rates sapped consumers’ willingness to open their wallets. We saw signs of that in FedEx's (NYSE:FDX) earnings earlier this week.
• November New Home Sales and University of Michigan Final Consumer Sentiment both cross the wires at 10 a.m. ET Friday, and then we’re done with data for the week. The consensus for New Home Sales is a seasonally adjusted 600,000, down from 632,000 in October.
• Consumer Sentiment is expected to be 59.1, even with the initial December estimate, according to research firm Briefing.com. Sentiment has been soft for months, implying that consumers may not be primed to spend. Another part of the report that could grab the market’s attention is one-year inflation expectations, which fell from 4.9% to 4.6% in the initial December report, the lowest in 15 months. It’ll be interesting to see if that number changed, especially with the Federal Reserve so concerned that inflation expectations could become entrenched, leading to a wage-price spiral.

Thinking Cap

If you’re a long-term investor, these are tough times. The SPX is down about 20% this year, and there’s been no relief in the bond market. It’s certainly understandable if you’re not particularly enjoying this holiday season. There’s no rule against reducing your stock exposure but remember not to let emotions cause you to sell. If you do decide to get out of some stocks, do so carefully and in a way that allows you to take advantage of tax-loss harvesting before the end of the year.

Also, keep in mind that if you have a retirement plan that automatically purchases stocks, it’s not a bad idea to keep that going, as unpleasant as it may seem when the market keeps sliding. The good thing about participation in your company’s retirement plan is that it allows you to take advantage of dollar-cost averaging, which means you get to buy stocks at lower prices when the market tanks.

And remember that those who exit the markets tend to miss out. Staying invested through good times and bad often turns out to be constructive, though certainly these are undeniably unpleasant times to be in the market.

Reviewing the Market Minutes

Risk-off came back into the mix Thursday as sectors like health care, utilities, and staples were among the leaders. Consumer discretionary and info tech rounded out the bottom of the daily sector numbers.

Here’s how the major indexes performed Thursday:

• The Dow Jones Industrial Average® ($DJI) fell 349 points, or 1.05%, to 33,027.
• The NASDAQ Composite ($COMP) slipped 2.18% to 10,476.
• The Russell 2000® (RUT) dropped 1.29% to 1,754.
• The SPX lost 56 points, or 1.45%, to close at 3,822.

Talking Technicals: There is some resilience in the market as today’s comeback in the last hour showed. Buyers surfaced after the SPX fell below 3,800, and the SPX managed to close well above that round number after its early afternoon slide to 3,764, the lowest intraday read since November 9. Also, it’s worth noting that Thursday’s 3,822 close marked yet another date in which the SPX managed to hold above a key Fibonacci retracement level of March 2020 through the January 2022 rally that stands near 3,819. That remains an interesting number on the charts.

Still, 3,800 maybe even more important. Twice this week, the SPX dropped below that intraday, and each time it found buyers. It shows when things really sell off, buyers come in, and that makes 3,800 a more important post-holiday level.

SPX, $COMP, and RUT Chart

In one of the most rapid market turndowns in weeks, technology and growth stocks headed for the pavement, as shown by the SPX (orange line), the $COMP (pink line), and the RUT (blue line).