Markets Drop on Growth and Inflation Concerns
Major stock indexes fell Tuesday as investors pulled back on expectations for substantial Federal Reserve interest rate cuts in early 2024. The Dow Jones Industrial Average shed over 300 points, while the S&P 500 and Nasdaq declined around 1.1%.
The declines came after economic data and comments from Fed officials lowered hopes that the central bank would cut rates by a half point at its upcoming meetings. Reports showed strong retail sales and production numbers for December, indicating the US economy remains resilient despite high inflation and interest rates.
Several Fed members also reiterated their focus on bringing inflation down from decades-high levels, dashing investor hopes of rapid rate cuts starting as early as March. Traders are now pricing in a quarter-point cut at mid-year.
“The market had gotten a little ahead of itself in expecting aggressive Fed easing soon, but the strong data makes that less likely,” said Mike Bell, global markets strategist at JPMorgan Asset Management. “We’ll see if the economy can achieve a soft landing, but recent numbers suggest it’s still holding up pretty well despite higher rates.”
Growth Concerns Weigh on Global Markets
Overseas shares also declined Tuesday amid worries over slowing global growth and uncertainty over the policy path ahead.
Chinese stocks led losses in Asia after the country reported fourth-quarter GDP growth of just 2.9%, missing forecasts. However, full-year expansion of 3% did manage to beat the government’s target.
Meanwhile, European shares dropped as lackluster earnings from big banks added to nerves over a potential recession on the continent later this year. Commodities also retreated, with oil prices shedding nearly 2%.
The declines came on the heels of Monday’s losses that saw the S&P 500 break below its 200-day moving average for the first time since 2020. Market volatility remains elevated as investors attempt to gauge the outlook for rates and growth.
Fed Poised to Push Ahead with Rate Hikes
Recent economic readings have shown resilience in consumer spending and industrial production, making it less likely that the Fed pauses its rate hiking campaign soon.
While officials may slow the pace of hikes, comments point to further increases this year as they try to tame inflation running north of 6%. Markets are now betting on rates peaking around 5% in mid-2023, up from 4.5% last week.
Higher rates raise borrowing costs across the economy and could eventually lead to a recession. But policymakers are hopeful supply chain improvements and easing food and energy costs can bring prices down without severely crimping growth.
The ability to achieve a soft landing remains in doubt, however, suggesting markets will stay volatile in coming months.
“There’s still a disconnect between what the Fed is saying about fighting inflation aggressively and what investors hope to see in terms of rapid rate cuts,” noted Wells Fargo strategist Sameer Samana. “That tug of war is likely to lead to choppy trading until there’s more clarity on whether we can avoid a hard landing.”
Market Impacts and Outlook
With monetary policy poised to remain restrictive in the near term, analysts expect continued pressure on rate-sensitive areas of the market like technology shares. The tech-heavy Nasdaq led Tuesday’s declines with a 1.3% drop. Higher Treasury yields may also weigh on prices for growth stocks.
“Tech and growth names still seem vulnerable until we get more visibility on rates peaking and inflation clearly rolling over,” said Anu Gaggar, global investment strategist at Commonwealth Financial Network. She recommends looking to value stocks and sectors like financials and energy.
Other strategists also highlight opportunities in beaten-down areas of the market, expecting a second-half rebound if the economy manages to skirt serious damage. Beaten-down megacap tech giants like Apple may also attract buyers.
But uncertainty persists over corporate earnings amid slowing growth and a stronger dollar. Big banks kicked off the Q4 reporting period with mixed results Tuesday. Companies across industries continue to flag impacts from higher costs and waning demand.
Still, any signs of peak inflation could lift market sentiment. Investors get more data on consumer prices Thursday.
“Inflation remains the key focal point,” noted Mark Haefele, chief investment officer at UBS Global Wealth Management. “Evidence of a convincing decline in US inflation will likely be required for markets to sustainably rebound.”
Table 1: Key Market Index Performance 1/17/2024
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