Closing Stock Market SummaryThe positive bias driving yesterday's gains dissipated today amid thinner holiday trading conditions. Market participants were reacting to disappointing earnings results and commentary from Micron (MU 49.43, -1.76, -3.4%) and CarMax (KMX 57.20, -2.17, -3.7%), a dour Leading Economic Indicators report, and some cautious-sounding remarks from influential hedge fund manager David Tepper on the market's prospects.
The market's concerns about the Fed potentially overtightening and causing a deeper economic setback, which has plagued investors for most of December, were stoked by the following factors:
- Micron noted it will be cutting approximately 10% of its staff in response to challenging industry conditions.
- CarMax said it expects widespread inflationary pressures, climbing interest rates, and low consumer confidence to remain headwinds for unit sales.
- The November Leading Economic Index was down 1.0% (consensus -0.4%), logging its ninth straight monthly decline.
- David Tepper said he is leaning short the equity markets as he expects the Fed and other central banks to keep tightening and for rates to remain high for a while, making it "difficult for things to go up." His comments resonated with market participants who recalled the hugely successful "Tepper Bottom" call he made in March 2009.
There was a bit of good news in play, too. The third estimate to Q3 GDP showed an upward revision to 3.2% (consensus 2.9%) from the second estimate of 2.9%, and weekly initial claims held at a remarkably low level of 216,000 ( consensus 225,000) for the week ending December 17 that is consistent with a tight labor market.
That good news did not offer support to the broader market presumably due to the understanding that it should persuade the Fed to remain on a tightening path. There was a compounding effect in that understanding since the data followed shortly after David Tepper told CNBC that he thinks the Fed and other central banks will keep tightening beyond what the market currently believes.
The resulting retreat was broad in nature with the major indices moving noticeably lower right out of the gate. The Nasdaq, S&P 500, and Dow were down 3.7%, 2.9%, and 2.4%, respectively, at today's lows.
The S&P 500 was stuck below the 3,800 level and Tuesday's low (3,795) for most of the session before the main indices managed to pare some of their losses in the afternoon trade. There was no specific news catalyst to account for the bounce, which appeared to be driven by some speculative bargain hunting interest following the early washout.
All 11 S&P 500 sectors closed in the red. The countercyclical health care (-0.2%) and consumer staples (-0.3%) sectors showed the slimmest losses while the heavily weighted consumer discretionary (-2.6%) and information technology (-2.5%) sectors fell to the bottom of the pack.
The consumer discretionary sector was weighed down by ongoing selling pressure in Tesla (TSLA 125.35, -12.22, -8.9%). This comes after news that Tesla will offer $7,500 discounts on Model 3 and Model Y cars this month, according to Reuters.
- Dow Jones Industrial Average: -9.1% YTD
- S&P Midcap 400: -14.9% YTD
- S&P 500: -19.8% YTD
- Russell 2000: -21.9% YTD
- Nasdaq Composite: -33.0% YTD
Reviewing today's economic data:
- The third estimate for Q3 GDP revealed that consumer spending increased 2.3%, versus 1.7% in the second estimate, and 2.0% in the second quarter. That upward revision helped drive an upward revision for Q3 GDP growth to 3.2% (consensus 2.9%) from the second estimate of 2.9%. The GDP Price Deflator was revised up to 4.4% ( consensus 4.3%) from 4.3%.
- The key takeaway from the report is that growth in the third quarter was stronger than previously expected and above potential, which is also why the Fed continued to raise rates aggressively in the third quarter.
- The latest weekly initial claims report won't silence the concerns about future Fed tightening either. Initial claims for the week ending December 17 increased by 2,000 to 216,000 (consensus 225,000). Continuing claims for the week ending December 10 decreased by 6,000 to 1.672 million.\
- The key takeaway from the report is that initial claims remain at remarkably low levels associated with a tight labor market. In turn, a tight labor market will remain associated with more Fed tightening.
- Leading Economic Index fell 1.0% in November (consensus -0.4%) following a revised -0.9% reading in October (from -0.8%).
- Weekly EIA Natural Gas Inventories showed a draw of 87 bcf versus last week's draw of 50 bcf
Looking ahead to Friday, market participants will receive the following economic data:
- 8:30 ET: November Durable Orders ( consensus -1.0%; prior 1.0%), Durable Orders ex-transportation ( consensus 0.1%; prior 0.5%), November Personal Income ( consensus 0.3%; prior 0.7%), Personal Spending (consensus 0.1%; prior 0.8%), PCE Prices (consensus 0.2%; prior 0.3%), and core PCE Prices (consensus 0.3%; prior 0.2%)
- 10:00 ET: November New Home Sales (consensus 600,000; prior 632,000) and final December University of Michigan Consumer Sentiment survey (consensus 59.1; prior 59.1)