Stocks Succumb to Meta’s Plunge

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.61%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.61%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.88%.  Trading on Thursday was volatile as the market searched for direction, with uncertainty about the economy, inflation, interest rates, and earnings.

Stocks saw underlying support from Thursday’s U.S. GDP report and the -8 bp decline in the 10-year T-note yield.  The Dow Jones Industrials index saw support from a +7.7% rally in Caterpillar (CAT), a +3.5% rally in Boeing (BA), a +3.31% rally in McDonald’s (MCD), and a +3.3% rally in Honeywell (HON).

The Nasdaq 100 index ($IUXX) was undercut by a massive -25% drop in Meta due to the disappointing late-Wednesday earnings report, which dragged most other major tech stocks lower.

Thursday’s U.S. Q3 GDP report of +2.6% (q/q annualized) was a bit stronger than the consensus of +2.4%, which eased recession concerns a bit. U.S. GDP in Q3 snapped the 2-quarter string of losses in Q1 (-1.6%) and Q2 (-0.6%), which could be defined as a technical recession.  The NBER isn’t likely to weigh in with its official recession dating until sometime next year.

Looking ahead, the consensus is for U.S. GDP in Q4 to show weak growth of +0.6% (q/q annualized) and then fall by -0.1% in Q1-2023.  On a calendar year basis, the consensus is for GDP growth to ease to +0.4% in 2023 from +1.7% in 2022 and the strong pandemic-recovery rate of +5.9% in 2021.

The Sep U.S. durable goods orders report of +0.4% m/m was weaker than expectations of +0.6% but August was revised higher to +0.2% from -0.2%. In a negative development, Sep capital goods orders ex defense and aircraft, a proxy for capital spending, fell -0.7%, weaker than expectations of +0.3%.

U.S. weekly initial unemployment claims rose +3,000 to 217,000, which showed a bit stronger labor market than expectations for a rise to 220,000. However, continuing claims rose +55,000 to 1.438 million, showing a weaker labor market than expectations for a small rise to 1.390 million.

The markets interpreted the outcome of Thursday’s ECB meeting as a “dovish tighten.”  The European Central Bank (ECB) raised its key interest rates sharply by +75 bp, but seemed to back off its guidance for further sharp rate hikes.  The ECB said in its post-meeting statement that it “expects to raise interest rates further.”  However, there was no mention of expectations for further sharp rate hikes. ECB President Lagarde said that the ECB might well still hike at several more meetings, which at least suggested an ending date for the ECB’s rate-hike regime.

Today’s stock movers…

Meta Platforms (META) fell sharply by -25% after the company took a hit from weak advertising revenues, and investors showed little confidence in CEO Zuckerberg’s heavy spending budget.  Mr. Zuckerberg asked investors for patience with the company’s expensive development efforts in the metaverse, short-form video (“Reels” to compete with Tik-Tok), and business messaging.  Meta’s quarterly revenue fell -4.5% y/y for only the second such drop in the company’s history.  The company’s guidance was for full-year 2022 expenses to be $85-87 billion and to grow to $96-101 billion in 2023.

The plunge in Meta sparked weakness in other mega-tech companies, which have taken a hit this year on a sharp slowdown in advertising revenues, concern about weaker consumer spending, and fears that days are over for rampant growth by mega-tech companies.  Amazon (AMZN) closed -4.22%, Apple (AAPL) closed -3.20%, Alphabet (GOOG) closed -2.50%, and Microsoft is (MSFT) closed -2.13%.

Shopify (SHOP) bucked the trend and rallied +17% after the company reported better-than-expected revenue and said it expects sales volume to outperform overall U.S. retail sales in Q4.

Twitter (TWTR) closed up +0.49% as Elon Musk visited Twitter headquarters on Wednesday and insisted that his $44 billion purchase of Twitter will close on Friday.  Mr. Musk will reportedly address Twitter staff on Friday.  Mr. Musk Thursday promised advertisers in a tweet that Twitter will not become a “free-for-all hellscape,” setting the lowest possible bar for him to meet with his takeover.  As a private company, Twitter after Friday will no longer be of interest to the stock market, although Mr. Musk will likely ensure that the company continues to make the headlines.

Big gainers in the Nasdaq 100 index Thursday included Constellation Energy (CEG), O’Reilly Automotive (ORLY), Marvel Technology (MRVL), and Honeywell (HON), all with gains of between +3% and +4%.

U.S.-listed Chinese stocks fell back Thursday after Wednesday’s rally on news that the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange said they would enhance coordination with other agencies to ensure the soundness of the equity, bond, and real estate markets. JD.com (JD), Baidu (BIDU), NetEase (NTES), and Alibaba Group Holding (BABA) all closed lower. Chinese stocks have recently seen weakness on concerns about Chinese President Xi’s hawkish Covid-zero and geopolitical signals.

Across the markets…

Dec 10-year T-notes (ZNZ22) Thursday closed up +19 ticks, and the 10-year T-note yield fell -8.2 bp to 3.921%.  T-note prices shook off the stronger-than-expected U.S. GDP increase, and instead adopted a bullish tone from the German bund market, which rallied sharply on hopes that the ECB is turning less hawkish after its +75 bp rate hike.  The German 10-year bund yield Thursday fell sharply by -15 bp to 1.96%. 

The U.S. T-note market was also supported by news in the GDP report that the U.S. Q3 GDP price index eased to +4.1% from +9.0% in Q2 and was weaker than expectations of +5.3%. However, the core PCE inflation measure of +4.5% was in line with expectations and was down just slightly from Q2’s +4.7%.

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