Markets: News  

By William Watts and Jamie Chisholm

U.S. stocks ended a choppy session mostly lower Tuesday, with the Nasdaq Composite closing at its lowest in more than two years as the tech-heavy index and the S&P 500 index extended a losing streak to five sessions.

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Stocks remain dogged by worries the Federal Reserve's desire to combat rampant inflation with still-higher borrowing costs will hurt economic activity and crimp corporate earnings.

"This is an awful stock market environment that is grappling with a weakening economy, uncertainty over earnings and how long the Fed's tightening will last, and sentiment issues with an extremely risk averse investor psychology," said David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif. with $3.85 billion in assets under management.

"While we believe a recession is inevitable, it's impossible to factor this into an actionable stock market view because we don't know how much recession risk is already priced into markets," he said, in emailed comments. "There is a significant chance that by the time we are in a recession, markets will already be pricing in the recovery, as markets are forward looking."

Large-cap tech-related shares, which had driven the stock-market rally off the 2020 pandemic lows, continued to be hit hard, with shares of Facebook parent Meta Platforms Inc. (META) down more than 4%. Video-streaming giant Netflix Inc. (NFLX), another pandemic highflier, was down more than 6%. Both Meta and Netflix have dropped more than 60% in the year to date.

Chip stocks were also hammered, with the PHLX Semiconductor Index dropping 2.5%. Chip stocks started to slide Friday with the SOX index down 12% since the announcement of widened restrictions on what U.S. chip makers can sell to China, potentially disrupting non-U.S. parts of the sector that may have manufacturing sites in China.

Read: Chip stocks could suffer worst year ever as effects of shortage-turned-glut spread

The policy-sensitive 2-year Treasury yield on Tuesday pulled back after rising above 4.3%, near its highest level since 2007. The short-duration benchmark was nearly 400 basis points lower a year ago before the Fed embarked on a rate hiking campaign to tackle consumer price rises running at their fastest pace in 40-years. The 10-year Treasury yield briefly popped above 4% again in early trading but was at 3.924% in recent trade.

See:Robert Shiller created an index that shows investors' fear of a stock market crash. Here's what it's saying now

In addition, the Bank of England said Tuesday that it would expand its daily U.K. bond purchase operations to include index-linked gilts, the second move this week aimed at trying to calm market volatility.

Volatility in U.S. markets came late in the session as BOE Gov. Andrew Bailey said pension fund managers had until Friday to rebalance, signaling the central bank wasn't prepared to extend its emergency operations beyond their planned expiration. The BOE first stepped in to stabilize the market last month on fears bond-market volatility could sink pension funds.

Earlier, the International Monetary Fund cut its outlook for economic growth in the United States to 1.6% this year, down from a July forecast of 2.3%. It expects meager 1% U.S. growth in 2023.

JPMorgan Chase (JPM) CEO Jamie Dimon on Monday warned additional interest rate rises by the Fed will be particularly painful, and the S&P 500 could fall by another 20%. The benchmark is already down 24.2% so far in 2022 through Monday. The tech-heavy Nasdaq Composite has shed 32.6% over the same period.

Deep Dive: The stock market is in trouble. That's because the bond market is 'very close to a crash.'

The third-quarter corporate earnings reporting season is about to begin also with JPMorgan Chase reporting on Friday along with Citigroup (C) and Morgan Stanley (MS). Analysts expect S&P 500 index aggregate earnings will grow by 4.5% for the period, though much of this is driven by an expected 6.3% gain for energy stocks, according to Refinitiv. Financials' earnings are forecast to fall 1.6%.

The market must contend with U.S. producer prices data on Wednesday and the consumer prices data on Thursday, reports that should further impact investors' thinking on the Fed's policy trajectory.

The dollar has been propelled sharply higher by the Fed's relatively aggressive rate-hiking cycle, and the currency's strength is seen as yet another headwind for the earnings of U.S. multinationals. The ICE U.S. Dollar Index backed off 0.2% on Tuesday.

-William Watts

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(END) Dow Jones Newswires

October 11, 2022 16:39 ET (20:39 GMT)

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