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Dow ends down over 750 points to book its worst day in three months as recession fears mount

MarketWatch logo MarketWatch 12/15/2022 Isabel Wang
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MARKET SNAPSHOT

U.S. stock indexes finished sharply lower on Thursday with the Dow Jones Industrial Average logging its biggest daily decline in over three months, as investors continued to digest tough talk from the Federal Reserve on inflation that revived concerns about a potential U.S. recession.

What happened
  • The Dow Jones Industrial Average fell 764.13 points, or 2.3%, to finish at 33,202.22. The index booked its biggest daily drop since Sept. 13, when the Dow dropped more than 1,200 points. 
  • The S&P 500 dropped 99.57 points, or 2.5%, ending at 3,895.75, as the large-cap index logged for its worst day since early October.
  • The Nasdaq Composite tumbled 360.36 points, or 3.2%, to finish at 10,810.53, booking its worst day since November 2.

Stocks posted moderate losses Wednesday after the Federal Reserve delivered a half-point rate hike and signaled that rates would likely peak above 5% in 2023.

What drove markets

Stocks saw losses deepen Thursday, a day after the Fed delivered a sobering assessment of its continuing inflation battle and as investors reacted to disappointing November retail sales. While stocks trimmed losses in the final hour of trade, they still ended back at Nov. 9 lows, according to Dow Jones Market Data.

The Federal Reserve hiked its interest rate by half a percentage point on Wednesday, with the benchmark rate projected to top out at 5.25%, higher than their September forecast of 4.75%.  

Central banks in Europe on Thursday followed the Federal Reserve in slowing the pace of interest rate increases. The European Central Bank and Bank of England hiked their key lending rates by 50 basis points, but policy makers at the ECB emphasized that market participants should prepare for a series of rate increases to come.

“Today is all about what I would call, ‘the sea of synchronized tightening,’” said Larry Adam, chief investment officer at Raymond James, via phone. “The message has been that they’re going to continue to be pretty aggressive raising rates.”

Eric Merlis, managing director and co-head of global markets at Citizens, thinks Thursday’s sharp selloff is what investors should have anticipated from the Fed’s rate hike and Chair Powell’s news conference.

“The market waited to hear what the European Central Bank and Bank of England had to say,” Merlis told MarketWatch via phone. However, Merlis also thinks the Fed’s peak rate forecast of above 5% “should have been completely expected” by markets.

“I thought [the terminal rate should be] somewhere between 5% and 5.5%. That’s sort of where the Fed’s standing right now, at least on the dots in the summary of economic projections,” he said, adding that he thinks the Fed signaled “continued willingness to look at data and reiterated that inflation is still too high.”

See: ‘The Fed is going to overdo it’: Financial markets react to U.S. central bank’s 2023 rate outlook and weak data

In economic data, sales at U.S. retailers fell by 0.6% in November, worse than the 0.3% contraction forecast from economists polled by The Wall Street Journal and the worst reading in more than a year.

Other data included weekly jobless claims and the Empire State manufacturing index, which declined to negative 11.2 in December. Meanwhile, Fed data showed industrial production fell 0.2% in November, the second straight monthly decline.

Thursday’s retail sales report grabbed investors’ attention as it showed that torrid inflation and rising borrowing costs appeared to finally be taking a toll on U.S. consumers.

“The 0.6% m/m fall in retail sales in November suggests that the resilience of consumers to much higher interest rates is starting to crumble,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Hunter also pointed out that retail sales weakened in November “despite the boost to real incomes from the continued sharp falls in gasoline prices in recent weeks, and suggests that higher borrowing costs, slower employment growth and an unusually low saving rate are now catching up with consumers.”

See: Stocks are plunging because the Fed ‘cannot lose the battle’ on inflation

Stocks and other assets have vacillated between gains and losses this week as investors digested a raft of economic data and central bank rate hikes.

Bond yields moved higher on Thursday, with the yield on the policy-sensitive 2-year Treasury  rising 3.3 basis points to 4.255% from 4.229% on Tuesday. Yields move in the opposite direction to prices.

The quarterly expiration of U.S. stock futures and options on Friday is also likely to boost trading volumes and add to volatility.

“That increases the likelihood that any moves can be exacerbated by expiring futures and options positions,” wrote Steve Sosnick, chief strategist at Interactive Brokers. “I believe that the effect of tomorrow’s expiration is already having an outsized impact on today’s market moves.  As of this morning, there were about 125,000 AM-expiring put and call options on SPX with a 3900 strike.”

Single-stock movers
  • Shares of both Hilton Worldwide Holdings Inc.  and Marriott International Inc. took a hit after a downgrade from Citigroup Inc. analysts. Shares of Hilton ended 2% lower, while Marriott stocks slumped 2.5%.
  • Shares of “FAANG” stocks including Amazon.com Inc.  and Meta Platforms Inc. finished down 3.4% and 4.5%, respectively.
  • Netflix Inc.  shares declined by 8.6% on reports that its ad-supported tier is off to a slower start.

Steve Goldstein contributed to this article

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