Tech sector leads stocks’ biggest retreat of ’23
Wall Street had its biggest pullback of the year Wednesday after a broad slide for stocks wiped out much of the benchmark Standard & Poor’s 500 index’s gains from last week.
The S&P 500 fell 1.6% after having been up as much as 0.6% in the early going. The Dow Jones industrial average lost 1.8% and the Nasdaq composite slid 1.2%, ending a seven-day winning streak. The losses are a reversal for the market, which kicked off the year with a two-week rally.
The selling came as new data showed that even as inflation continues to cool, the economy is slowing, heightening worries about the possibility of a recession. Meanwhile, a key Federal Reserve policymaker said interest rates need to go higher than the central bank has previously signaled.
The government reported that Americans cut back on their spending at retailers more than anticipated last month, the second straight decline. Separately, the Fed said U.S. industrial production, which covers manufacturing, mining and utilities, fell in December much more than economists had expected.
The government also reported more encouraging inflation data. Wholesale prices rose 6.2% in December from a year earlier, a sixth straight slowdown for the measure of prices before they are passed along to consumers.
“The appearances are that it looks like something is moving inf lation and retail sales in the right direction, which is to say softer,” said Tom Martin, senior portfolio manager at Globalt Investments. “The question is, what does it really mean?”
Wall Street has been hoping that easing inflation and a slowdown in economic growth might influence the Federal Reserve’s position on interest rates. The central bank aggressively raised rates throughout 2022 in an effort to cool hot inflation, but that has hurt prices of stocks and bonds, and risks going too far and bringing on a recession.
Although there’s growing evidence that high inflation is finally easing, further rate hikes are still needed, said Loretta Mester, president of the Federal Reserve Bank of Cleveland.
“I still see the larger risk coming from tightening too little,” Mester said in an interview Tuesday with the Associated Press.
Mester stressed her belief that the Fed’s key rate should rise a “little bit” above the 5% to 5.25% range that policymakers have collectively projected for the end of this year.
The central bank has raised its key overnight rate to a range of 4.25% to 4.50% from roughly zero a year ago. The Fed will announce its next decision on interest rates Feb. 1. Investors are largely forecasting an increase of just 0.25 of a percentage point next month, down from December’s halfpoint hike and from four prior increases of 0.75 of a percentage point.
“Today’s retail sales and industrial production disappointments increase the likelihood of a recession,” said Sam Stovall, chief investment strategist at CFRA.
The broader economic picture is still not clear enough to see whether the Fed’s fight against inflation is working well enough to avoid a recession. Several major banks have forecast at least a mild recession at some point in 2023.
Technology stocks were among the biggest drags on the market, including a 1.9% drop in Microsoft after the tech titan joined others in its industry in announcing layoffs. The software giant is cutting 10,000 workers or almost 5% of its workforce.
All told, the S&P 500 fell 62.11 points to 3,928.86. The Dow dropped 613.89 points to 33,296.96, and the techheavy Nasdaq slid 138.10 points to close at 10,957.86.
Small-company stocks also lost ground. The Russell 2000 index fell 29.92 points, or 1.6%, to 1,854.36.
Treasury yields fell broadly as traders reviewed the latest economic data. The 10-year Treasury yield, which influences interest rates on mortgages and other loans, fell to 3.37% from 3.55% late Tuesday.
The yield on the two-year Treasury, which tracks expectations for future Fed action, fell to 4.09% from about 4.16% just before the latest economic data were released. It was as high as 4.21% late Tuesday.