Dow, S&P 500 book third straight day of losses as investors digest mixed signals on economy

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MARKET SNAPSHOT

U.S. stocks ended lower for a third straight session Thursday as investors weighed mixed signals on the strength of the economy and digested another round of corporate earnings reports ahead of a Federal Reserve policy meeting in early February.

How stocks traded

  • The Dow Jones Industrial Average fell 252.40 points, or 0.8%, to end at 33,044.56.
  • The S&P 500 fell 30.01 points, or 0.8%, to finish at 3,898.85.
  • The Nasdaq Composite shed 104.74 points, or 1%, ending at 10,852.27.

On Wednesday, the Dow fell more than 600 points, or 1.8%, while the S&P 500 shed 1.6% and the Nasdaq Composite declined 1.2%. The S&P 500’s decline was its biggest since Dec. 15, chopping its gain for the year to just 2.3%.

What drove markets

Dow Jones Industrial Average and S&P 500 index extended their losses to a third session on Thursday with investors focusing on further signs of a weakening U.S. economy, while weighing on the latest remarks from the Federal Reserve officials. The Nasdaq Composite fell 1%, notching its second day of losses.

Good news for the economy also appeared to be bad news for stocks this week. First-time claims for unemployment benefits unexpectedly fell by 15,000 to 190,000 in the seven days ending Jan 14., the lowest reading since September. Construction on new U.S. homes fell a seasonally adjusted 1.4% in December to 1.38 million, the Commerce Department said Thursday. 

“This morning’s data illustrates that the increasingly darkening cloud of weakening economic data has a silver lining—a persistently strong labor market,” said José Torres, senior economist at Interactive Brokers.

Torres thinks unemployment claims show that it’s a job seekers’ labor market despite high-profile technology sector layoffs. Employers are still hesitant to lay off workers due to a tight labor market, low labor force participation and the nation having 1.8 job openings for every unemployed individual, he said.

Data on Wednesday showed December retail sales dropped 1.1%, contracting for the second month in a row. Meanwhile, industrial production slumped 0.7% in December in the biggest monthly decline since September 2021.

“What just some weeks ago would have seen markets cheering the weaker data as it would have suggested correctly that the Fed’s aggressive rate hike campaign is doing its job in tamping down the demand side of the economy, is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike,” said Quincy Krosby, chief global strategist for LPL Financial, in a note.

See: Fed’s Brainard: Interest rate policy will have to be restrictive ‘for some time’ even with recent moderation of inflation

Nevertheless, Federal Reserve Vice Chairman Lael Brainard said on Thursday that interest rate policy will have to be restrictive “for some time” even with the recent moderation of inflation. Susan Collins, the president of the Boston Fed, also reiterated the need for the central bank to raise the policy rates further to get inflation on a steady downward path.

Their comments came in a day after St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester both reiterated that they thought interest rates needed to go higher still to ensure inflation falls back to the central bank’s 2% target, though Dallas Fed President Lorie Logan said the Fed should slow down the pace of its interest-rate hikes until more data shows where the economy is headed.

See: What does the debt ceiling mean for markets? Here’s why investors are concerned.

Treasury Secretary Janet Yellen confirmed to top U.S. lawmakers in a letter that her department began to use “extraordinary measures” on Thursday due to the federal government hitting its ceiling for borrowing. She had indicated last week that such a move was coming.

Of particular concern to equity bulls is that the S&P 500 index failed to break decisively above the 4,000 level this week and has been rebuffed again by its 200-day moving average, meaning the bear market downtrend remains intact.

A mixed fourth-quarter earnings reporting season to date has also constrained bullish impulses. Investors awaited Netflix Inc. earnings after the bell Thursday.

Over the past few weeks, earnings expectations for the first quarter and the second quarter of 2023 switched from year-over-year growth to year-over-year declines, said John Butters, senior earnings analyst at FactSet, in a Wednesday update.

Expectations for both quarters have been falling over the past few months, he added.

On June 30, the estimated earnings growth rate for Q1 2023 was 9.6%, and the estimated earnings growth rate for Q2 2023 was 10.3%, he said. By Sept. 30, the estimated earnings growth rate for Q1 2023 was 6.3%, and the estimated earnings growth rate for Q2 2023 was 5.1%. As of Wednesday, the estimated earnings decline for Q1 2023 is -0.6%, and the estimated earnings decline for Q2 2023 is -0.7%, FactSet data show.

Companies in focus

  • Procter & Gamble Co. shares finished 2.1% lower on Thursday, shaking off early weakness seen after the consumer goods giant reported fiscal second-quarter profit that matched expectations, but volume that fell more than some analysts had forecast.
  • Alcoa Corp. shares were down 7.4% after the aluminum maker reported a second consecutive quarterly loss, saying it has tried to lessen the impact throughout the year of high costs for raw materials and energy and lower prices for its alumina and aluminum.
  • Shares of Discover Financial Services fell 0.4% after the credit card’s forecast for net charge-offs on credit card transactions came in worse than Wall Street’s targets.
  • Shares of Charles Schwab Corp. slumped 6.2% after BofA Securities on Thursday announced a rare double downgrade of the online broker after its fourth-quarter result disappointed Wall Street.
  • Genius Group Limited stock rallied 290% on Thursday after it appointed a former F.B.I. director to investigate alleged illegal trading in its stock.

—Jamie Chisholm contributed to this article.

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