Stocks End Slightly Lower on Recession Fears

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.13%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.15%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.16%. 

Stock indexes Wednesday fluctuated between moderate gains and losses throughout the day in volatile trade and finished slightly lower. Stocks erased overnight losses and moved higher Wednesday morning after Fed Chair Powell pledged to curb inflation and said the U.S. economy is strong enough to handle Fed tightening.  After that, however, stocks gave up their advance and closed lower on persistent concern that Fed rate hikes would derail the economy. Also, a drop of more than -3% in crude prices Wednesday to a 6-week low weighed on energy stocks. 

Stocks also found support Wednesday on dovish comments from Chicago Fed President Evans, who said a 100 bp rate hike by the Fed was unnecessary. In addition, stocks found support on a decline in inflation expectations Wednesday to a 3-3/4 month low that pushed the 10-year T-note yield down to a 1-1/2 week low of 3.122%.

Fed Chair Powell said the Fed is strongly committed to returning inflation to 2% and that "ongoing rate hikes are appropriate." He also said that "the U.S. economy is very strong and can handle tighter monetary policy."  He added that while he did not see the likelihood of a recession as particularly elevated right now, it was "certainly a possibility."

Chicago Fed President Evans said a 75 bp rate hike by the Fed is a "very reasonable place" for the July FOMC meeting, and he doesn’t think a 100 bp Fed rate increase is necessary.  He added, "I think that by the end of the year, we will be doing 25 bp rate hikes."

Today’s stock movers…

A slump of more than -3% in crude oil prices Wednesday to a 6-week low undercut energy stocks and energy service providers.  Marathon Oil (MRO) and APA Corp (APA) closed down by more than -7%.  Also, ConocoPhillips (COP) and Phillips 66 (PSX) closed down by more than -5%.  Devon Energy (DVN), Diamondback Energy (FANG), Haliburton (HAL), and Chevron (CVX) closed down by more than -4%. 

Altria Group (MO) closed down more than -9% Wednesday to lead losers in the S&P 500 after Dow Jones reported that the FDA is preparing to order Juul Labs to take its e-cigarettes off the U.S. market.  Altria Group holds a 35% stake in Juul Labs. 

Dow Inc (DOW) closed down more than -4% Wednesday to lead losers in the Dow Jones Industrials after Credit Suisse downgraded the stock to underperform from neutral. 

Freeport-McMoRan (FCX) closed down more than -7% Wednesday after the price of copper dropped more than -3% to a 3-1/2 month low.

DaVita (DVA) closed up by more than +5% Wednesday to lead gainers in the S&P 500.  DaVita recovered some of Tuesday’s -15% plunge after Truist said in a note to clients Wednesday that any potential impact from Tuesday’s Supreme Court ruling will take time and sees the industry “seeking a legislative fix.”  DaVita plunged Tuesday after the Supreme Court ruled in favor of an Ohio hospital’s employee health plan in a dispute with DaVita over how much the hospital pays for kidney dialysis.

Homebuilders rallied Wednesday after the 10-year T-note yield dropped to a 1-1/2 week low, which will reduce mortgage rates and support housing demand. DR Horton (DHI) closed up more than +4%.  Also, Lennar (LEN) and KB Home (KBH) closed up more than +3%,  In addition, PulteGroup (PHM) closed up more than +2%, and Toll Brothers (TOL) closed up more than +1%. 

Moderna (MRNA) closed up more than +4% Wednesday to lead gainers in the Nasdaq 100 after the company said its Covid omicron-targeting vaccine triggered the production of antibodies against the strain’s newest variants. 

Netflix (NFLX) closed up more than +4% Wednesday after it said it is seeking to sell and serve ads around programs to boost revenue and was in talks with Google and Comcast to partner on ads.

DocuSign (DOCU) closed up more than +4% Wednesday after the company said that CEO Springer is stepping down, a move that may clear the path for the board of directors to explore alternatives for the company, including a potential sale.

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed up by +1-5/32 points, and the 10-year T-note yield fell -12.8 bp to 3.147%.  Sep T-notes Wednesday rallied to a 1-12 week high, and the 10-year T-note yield fell to a 1-1/2 week low of 3.122%.  Fed comments Wednesday boosted T-note prices when Fed Chair Powell said the Fed is strongly committed to returning inflation to 2%, and Chicago Fed President Evans said a 100 bp Fed rate hike was unnecessary.  A decline in inflation expectations was also bullish for T-notes after the 10-year breakeven inflation rate dropped to a 3-3/4 month low Wednesday at 2.537%.

T-notes maintained their gains Wednesday on strong demand for the Treasury’s $14 billion auction of 20-year T-bonds.  The auction had a bid-to-cover ratio of 2.60, stronger than the 10-auction average of 2.49. 

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