Dow and stock market tumble. So much for an end-of-year rally

New York

Christmas is only 10 days away, and investors hoping for a Santa get-together have found little Christmas cheer on Wall Street this month — especially Thursday.

The Dow plummeted nearly 765 points, or 2.3%, on Thursday and is down 4% in December after solid gains in the previous two months. Verizon (VZ) was the only one of the 30 Dow stocks in positive territory.

The S&P 500 was down 2.5% and the Nasdaq was down 3.2% on Thursday. The S&P 500 is now down 4.5% for the month, while the Nasdaq is down nearly 6%.

Shares fell Thursday as investors continued to worry about the Federal Reserve’s latest economic forecasts. As expected, the Fed raised interest rates by “only” half a point on Wednesday. The Bank of England and the European Central Bank followed on Thursday morning with their own increases of half a point.

But the Fed also indicated that it expects the US economy to barely grow in 2023. The Fed’s new forecasts also call for a larger rise in the unemployment rate, a larger increase in consumer prices and higher interest rates than expected in September.

It didn’t help that the Commerce Department on Thursday reported a much larger-than-expected drop in retail sales for November. All of this has led some to become concerned about the dreaded stagflation scenario of stagnant growth and continued inflation. Equities could therefore face a difficult period.

“This is not a buy-the-dip day. 2022 has not been a buy-the-dip year. if you did, you lost money,” said Judith Lu, CEO of Blue Zone Wealth Advisors. “Inflation is way too high and the Fed has this monstrous job of getting a handle on it.”

Lu said she thinks stocks are currently overvalued as analysts expect earnings to only increase about 5% in 2023. Those projections are likely “wishful thinking” and “too ambitious,” she added.

Of course, the delay fears cannot materialize. The economy could avoid going into recession and inflationary pressures could cool faster than expected. But in the near future, market volatility may at least return.

Investors are concerned that the Fed (and perhaps other global central banks) will continue to act as well, even as there are already indications that consumers are starting to feel a one-two punch from higher prices and higher interest rates. For its part, the labor market remains on a solid footing with weekly jobless claims just hitting their lowest level since September.

Jefferies economists Aneta Markowska and Thomas Simons paraphrased TS Eliot in a report on retail sales Thursday, saying, “The holiday shopping season started not with a bang, but with a whimper.”

“This year’s Black Friday sales clearly fell short of expectations,” they added.

It also doesn’t help that Powell has previously made the mistake of behaving too aggressively for the holiday season, a time when market movements are often magnified due to lower year-end trading volume.

“Let’s not forget that Jay Powell ruined a Santa Claus Rally in 2018 when he got really aggressive and talked rates up, then the market basically went into a bear market until Christmas Eve,” said Nancy Tengler, CEO of Laffer Tengler Investments, in a report. “So I think you want to stay vigilant and focused for the long haul.”

Some experts hope that jitters about the economy will soon subside. After all, a recession wouldn’t come as a big surprise at this point. Businesses, consumers and investors have been bracing themselves for months.

“The market has been anticipating a recession strongly all year,” said Eric Marshall, portfolio manager at Hodges Capital. “This could be a less deep recession.”

Marshall said investors should look at beaten-up stocks in the technology, healthcare and consumer sectors. They may be the first to withdraw.

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