Topline
A poor economic report and alarm over corporate earnings sent markets into a tizzy Thursday, as anxiety about a suffocating economic scenario threw a wet blanket on recent stock gains.
Thursday was a brutal day for long investors.
Key Facts
The Dow Jones Industrial Average collapsed 1.8%, or 690 points, and the S&P 500 and tech-heavy Nasdaq tanked 1.5% and 2.1%, respectively, by 10 a.m. ET.
It’s the Dow’s worst day since Feb. 21, 2023 and the S&P’s and Nasdaq’s biggest respective daily drops since Jan. 31.
The sharp selloff came after the U.S. reported its worst quarterly economic growth in nearly two years, with the gross domestic product report also indicating inflation rose noticeably over the first three months of 2024, indicating there’s growing potential the U.S. will enter a long-feared period of stagnation, a dire scenario in which inflation remains above the desired 2% level as economic growth slows, diminishing corporate earnings power and consumer spending power alike.
Also driving poor sentiment was Facebook parent Meta’s late Wednesday warning about escalating expenses, with much of Thursday’s bloodbath concentrated among capital-intensive technology stocks: Shares of Meta collapsed about 15%, while shares of peers Alphabet, Amazon and Microsoft fell more than 3% apiece.
The bond market also declined, as yields for six-month and 10-year U.S. Treasury notes climbed to their highest levels of this year—higher yields mean existing bonds lost value—as expectations recalibrated for when, and by how much, the Federal Reserve will cut interest rates.
Crucial Quote
The GDP report was “the worst of both worlds,” Independent Advisor Alliance’s chief investment officer Chris Zaccarelli wrote in emailed comments. “The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing,” explained Zaccarelli. “If neither are headed in the right direction, then that’s going to be bad news for markets.”
Surprising Fact
Traders now price in just a 9.5% probability that the Fed will cut interest rates during the first half of the year, an unbelievable turn from the 100% odds of a first-half cut implied as recently as Feb. 1, according to CME FedWatch Tool. The rate swap market expects 25 basis points of cuts this year as the most likely outcome, a far cry from the 175 basis points priced in just three months ago.
Key Background
Rate cuts are crucial for the stock market as they decrease the cost of debt financing most major corporations rely upon to do business, boosting overall profits, and they help lure investors away from the slam-dunk returns posed by U.S. government bonds, driving up share prices. Broader stock returns remain solid year-to-date, evidenced by the S&P’s 5% gain, but the benchmark index is down a chilling 5% in April alone.
Further Reading
