The stock market fell for a third consecutive day on Friday after manufacturing data added to fears the economy is headed for a recession – steepening losses that have pushed major indices to their lowest levels in more than a month amid volatility, which stems from a series of options set just before expiration.
The Dow Jones Industrial Average slipped nearly 282 points, or 0.9%, to 32,920 on Friday, while the S&P 500 and the tech-heavy Nasdaq similarly fell to monthly lows, falling 1.1% and 1%, respectively.
Losses deepened after S&P Global reported that private sector companies were ending the year in a “stronger downturn on weak demand and pricing pressures,” with new export orders in December falling for the seventh straight month and new business across the private sector slipping the fastest Tempo since May 2020.
The data “confirmed Wall Street’s fears that the economy is fast heading into a recession,” Oanda analyst Ed Moya said on Friday, making borrowing more spending and slowing the economy to remain in a restrictive range.
Officials have done little to allay those fears: On Friday, New York Federal Reserve Chairman John Williams told Bloomberg Television that stubborn inflation is likely to justify higher interest rates, possibly “higher than what,” for some time [officials] have written down.”
In an email, LPL Financial chief strategist Quincy Krosby said about $4 trillion worth of options that could expire in Friday’s session further heightened market sentiment, effectively forcing investors to either double down on risky bets or Liquidating their positions – the perfect recipe for volatility.
Friday marked a quarterly event that will see large swathes of options trades expiring all at once — which usually boosts market volume, Krosby notes, as quantitative traders and hedge funds that place massive market-moving bets are forced to reconsider those positions.
“Markets are largely giving up hope” that easing price pressures will convince central bank officials that their job of taming inflation is done, says Vital Knowledge Media analyst Adam Crisafulli. He notes that pessimism is likely to persist in the coming weeks as the next CPI report is not scheduled to be released before January 12th.
While acknowledging that stock market volatility could continue in the first quarter, Nancy Tengler, CEO of Laffer Tengler Investments, believes now is the time to start buying stocks during the sell-off. She points to easing inflation as a looming advantage for stocks, and she points out that in 1982 – another period plagued by high inflation – stocks started to rise again a few months before the Fed changed its hawkish tone on interest rate hikes. After that, they made up all the losses in just three months, notes Tengler.
Stocks have struggled since the Fed began raising rates in March. According to Goldman Sachs, 2022 will likely be the sixth most volatile year since the Great Depression. After rising nearly 27% in 2021, the S&P is down nearly 20% this year, and the Nasdaq is down 32%.
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