U.S. stock indexes suffered their worst session of the year on Tuesday, dragged down by a disappointing forecast from Home Depot and growing concerns that the Federal Reserve will keep interest rates higher for longer.
After rising sharply to start 2023, stocks have stumbled in recent weeks as hot economic data has made investors anxious about the path of US monetary policy.
Although inflation has fallen from its recent peak, it remains high. Unemployment has fallen to a 53-year low, and retail sales are growing at a healthy clip. This combination has led investors to expect the Fed to continue raising interest rates and then keep them higher for longer.
These shifting expectations have begun to take the steam out of the stock market’s rally, with the S&P 500 down 4.4% from its closing rally this year.
The S&P 500 fell 81.75 points, or 2%, to 3,997.34 on Tuesday. The Dow Jones Industrial Average fell 697.10 points, or 2.1%, to 33,129.59, erasing gains for the year. The technology-focused Nasdaq Composite fell 294.97 points, or 2.5%, to 11,492.30.
All three indices recorded their biggest one-day point and percentage drops since 15 December. Markets were closed Monday for Presidents Day.
All 11 sectors of the S&P 500 traded lower, as did 29 of the 30 stocks in the Dow.
“We keep seeing this pattern of exuberance and then disappointment,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown. Once the Fed stops raising interest rates, she added, “I think we’ll see markets calm, but until then we’re going to see big cycles of volatility.”
Home Depot’s disappointing report sent ripples through the market. The home improvement retailer warned that profits will fall this year as it invests another $1 billion in wage increases for its hourly workers. The IT shares fell $22.45, or 7.1%, to $295.50, their biggest one-day percentage decline in a year and their lowest close since November, according to Dow Jones Market Data. Shares of rival Lowe’s fell $10.90, or 5.1%, to $201.85.
Home Depot’s fall shaved 148 points off the Dow and weighed on the consumer discretionary segment of the S&P 500, which fell 3.3% as the index’s weakest leg.
Shares of homebuilders also fell after new data showing sales of previously owned homes fell for a 12th consecutive month in January. Toll Brothers,
DR Horton and PulteGroup fell more than 2%.
Meanwhile, government bond yields have risen sharply. The yield on the 10-year US Treasury note rose to 3.953%, up from 3.827% on Friday – and markedly higher than the closing low of 3.374% this year. Interest rates rise when bond prices fall.
A team of strategists at JPMorgan led by Mislav Matejka warned in a note on Monday that the first quarter could mark the high point of the year for stocks. It is too early to believe that a recession will not happen, as monetary tightening can have an impact that lags by as much as one to two years, they said.
“The fallout is likely still ahead,” the strategists wrote.
In another sign of investors’ changing interest rate expectations, the dollar strengthened, with the WSJ Dollar Index climbing 0.3%. The dollar index initially fell to start 2023, but has strengthened again recently, noting a slight uptick for the year.
Earnings reports remain in focus, with investors analyzing results from Walmart for clues about how inflation is changing consumer habits. Shoppers flock to the big-box retailer for food and other essentials, boosting sales and earnings for the latest quarter. However, the company gave a subdued outlook for the year.
Walmart shares rose 89 cents, or 0.6%, to $147.33 and were the lone gainer in the Dow.
As the earnings season heads into the playoffs, results have largely been in line with expectations, said Karyn Cavanaugh, chief investment officer at Carolinas Wealth Management. The market expected a fall in quarterly earnings, and got it. And positive revisions to the companies’ outlook have been few and far between, she added.
“It’s just not something to give the market any kind of mojo,” Cavanaugh said.
Despite Tuesday’s disappointing home sales numbers, some investors believe the real estate market is about to turn around. Potential sellers have been held back by their reluctance to trade in their current mortgages for new ones at higher rates, said Art Hogan, market strategist at B. Riley Wealth, adding that potential buyers have been put off by high prices.
“We’re getting ready to break that deadlock,” Hogan said, because sellers are getting used to the “new normal” of mortgage rates above 6%, while prices have fallen enough to entice buyers, especially the many millennials who are now in their mid-30s, an age when many people start families and establish households.
“I’m optimistic about spring,” Mr. Hogan said.
Abroad, the pan-continental Stoxx Europe 600 ticked down 0.2%, paring earlier losses after surveys showed business activity in the eurozone and Britain rose faster than expected in February.
In Asia, Hong Kong’s Hang Seng index fell 1.7%, weighed down by the technology sector. Japan’s Nikkei 225 also fell, losing 0.2%. In mainland China, the Shanghai Composite bucked the trend and rose 0.5%.
Commodities were mixed, with US crude oil futures down 0.2%, natural gas down 8.9%, gold down 0.4% and copper up 2.9%.
Write to Caitlin McCabe at [email protected] and Bob Henderson at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8