Markets tumbled dramatically Tuesday as fears about the Federal Reserve’s next rate hike piled up and retailers provided poor projections.
The Dow Jones Industrial Average fell 696 points, or 2.1%, to end the year in negative territory. The S&P 500 fell 2%, while the Nasdaq Composite fell 2.5%. The Russell 2000 small-cap index was down 2.7%, on track for its worst day of the year.
However, the 10-year Treasury yield has risen to about 4%.
Rising yields, as well as equity moves (over 90% of S&P 500 stocks closed in the red), indicate that the Federal Reserve may not be done raising interest rates. According to the CME FedWatch Tool, 24% of traders predicted a 50 basis point increase at the Fed’s March meeting, up from 9% a week earlier.
Tuesday’s strong economic statistics added to the policy rate debate. On Tuesday, the S&P Global Flash Composite Output Index, which covers the manufacturing and services sectors, hit an eight-month high of 50.2. Strong demand for services drove the increase, but manufacturing remained sluggish.
The gain comes on the heels of stronger-than-expected retail sales statistics, which rose by 3% in January, above estimates of a 1.7% increase, according to data released last week. Nonfarm payrolls grew by 517,000 last month, up from 223,000 in December, indicating that the labour market remained strong. Overall, it suggests that the Fed still has a long way to go in its efforts to relieve price pressures by reducing demand for goods and services.
“The existing home market has turned on a dime since the Fed began pivoting away from stimulus in early 2022 and mortgage rates surged,” said Bill Adams, chief economist for Comerica Bank.
The minutes of the Fed’s February meeting, which are expected on Wednesday, will be eagerly watched by investors.
In terms of economic statistics, the second estimate for the fourth-quarter GDP in the United States is expected Thursday, and personal consumption expenditures (PCE) are due Friday. The PCE is the Fed’s preferred inflation metric.
This week marks the start of earnings season for big retailers. Walmart (ticker: WMT) announced great quarterly results, but the company provided a cautious financial forecast. The corporation blamed a method of inventory accounting known as “last in, first out,” or LIFO, in which recently acquired products, which cost more, ate into future revenues. The stock gained 0.6%.
Home Depot (HD) also released earnings early Tuesday. The corporation exceeded profitability estimates while falling short on revenue and issuing poor projections. The stock dropped 7%.
“Retailer earnings imply a difficult year ahead, which should sustain the pressure on equities,” said Edward Moya, senior market analyst at brokerage OANDA.
Meanwhile, rising global tensions may cause a market correction. Russia’s President Putin stated on Tuesday that he is willing to test nuclear weapons if the United States does so first and that the nation has halted its participation in the nuclear-arms control pact. According to Tass, a Russian news site, China’s senior foreign affairs official Wang Yi landed in Moscow on Tuesday.