Dow erases 300-point gain as S&P 500 struggles to extend ‘soft-landing’ rally


The Dow Jones Industrial Average posted a big gain on Monday afternoon, while the S&P 500 was struggling to extend gains posted late last week after a slowdown in wage growth stoked hopes of a “soft landing ” for the economy as the Federal Reserve continued. its efforts to fight inflation.

Skeptics see the rebound as part of what is likely to be continued tug-of-war between market participants and Fed officials who have stressed their expectations that the economy will see a period of substantial slowdown to end inflation.

How stocks are traded
  • The Dow Jones Industrial Average DJIA,
    -0.34%
    fell 108 points, or 0.3%, to 33,523, after rising nearly 305 points to a session high.

  • The S&P 500 SPX,
    -0.08%
    it was flat near 3,893.

  • The Nasdaq Composite COMP,
    +11.75%
    it remained at 76 points, or 0.7%, up to 10,646.

Stocks rose sharply on Friday, turning the major indexes positive for the week. The Dow and S&P 500 posted weekly gains of 1.5%, while the Nasdaq Composite advanced 1%.

What is driving the markets

The first full trading week of the new year started on a positive note, but gains were erased or narrowed by late afternoon. A downfall of pharmaceutical companies Amgen Inc.
AMGN,
-1.85%,
Johnson & Johnson
JNJ,
-2.60%
i Merck & Co.
MRK,
-3.91%
weighed on the Dow.

Stocks rose initially as traders looked to extend a big rally on Friday, when jobs and services data raised hopes that the Federal Reserve may soon stop raising interest rates and that the northern economy – American can avoid a hard landing.

The non-farm payrolls report showed a healthy pace of job creation and an unemployment rate of just 3.5%. But it also showed a slowdown in wage growth, which could ease pressure on services sector inflation, an area of ​​price pressure the Fed is watching closely as it tightens monetary policy.

Indeed, an ISM survey of services sector activity illustrated how the Fed’s rate hike (4.25 percentage point hikes since March) already appears to be hurting the economy .

Investors were thus buoyed by hopes that the Fed could soon stop raising borrowing costs and that any economic downturn would not be so severe as to negatively affect corporate earnings.

Last week’s economic data provided U.S. equity investors with evidence of damage in both manufacturing and services, signs of cooling inflation and wage pressures, and signs that the labor market remains strong despite some erosion, said Lori Calvasina, head of US equity strategy at RBC Capital. Markets, in a Monday note.

“All of this brings us closer to the end of the hiking cycle and supports the ‘modest recession, if any’ narrative, and we see Friday’s gains in the major US indices as a well-deserved sigh of relief” , he wrote.

But last week’s choppy price patterns could turn out to be the norm, analysts said.

“In addition to the likelihood of interest rates remaining high and a possible economic slowdown, any upside from slowing inflation may be offset by still-high stock valuations and overly optimistic earnings expectations,” he said Chris Larkin, managing director of E-commerce trading at Morgan Stanley.

“It could be a recipe for choppy trading in the short and long term as traders prepare this week for their first look at earnings and inflation data for 2023,” Larkin said.

San Francisco Fed President Mary Daly said on Monday that she expects the central bank to raise interest rates above 5% in order to reduce inflation.

“I think anything above 5 is absolutely likely, in my judgment,” Daly said during a streamed interview with The Wall Street Journal.

Analysts said the positive narrative could be tested again later this week when the US consumer price index is released on Thursday, followed the day after the fourth-quarter corporate earnings season, with JPMorgan Chase JPM.
-0.43%,
Bank of America BAC,
-1.54%
and Citigroup C,
+0.49%
presenting their results.

The New York Fed said Monday that its December Survey of Consumer Expectations showed that consumers see inflation running at a 5% rate from now. That’s down from 5.2% the previous month and the lowest level since July 2021.

A pullback in Treasury yields, which extended last week’s slide, helped prop up the tech-heavy Nasdaq. Last year’s sharp rise in yields, which move against Treasury prices, crushed large-cap stocks of technology and technology-related companies, whose lofty valuations were based on flows of effective in the future. Higher Treasury yields mean these future flows are more discounted.

Helping support sentiment on Monday was a positive showing for Asian shares, with Hong Kong’s Hang Seng HSI,
+1.89%
up 1.9% as investors cheered China’s reopening as it eased COVID-19 restrictions.

Companies in focus
  • Goldman Sachs Group Inc.
    GS,
    +1.41%
    is scheduled to begin a major round of layoffs this week, cutting as many as 3,200 jobs, according to a Bloomberg report Monday. Shares rose 1.6%.

  • Shares of Lululemon Athletica Inc.
    LULU,
    -9.29%
    fell 9.5% after the yoga apparel company revised its fourth-quarter guidance on Monday by raising its revenue guidance, adjusting its earnings-per-share guidance to a tighter range and cutting margin guidance .

  • Tesla Inc.
    TSLA,
    +5.93%
    shares rose 6.6%, continuing a move that saw the stock reverse an intraday loss of 8% on Friday to close up 2.5%. The initial drop came after Tesla said it has cut prices in China for the second time in three months, in an apparent effort to boost sales of its electric vehicles hours after announcing disappointing December deliveries in China .

  • American depot recipes from the Chinese e-commerce giant Alibaba Group Holding Ltd.
    baba,
    +3.22%
    rose 3.5% after co-founder Jack Ma relinquished control of Chinese financial technology firm Ant Group. Alibaba has an approximately 33% stake in Ant Group.

  • Popular meme stock Bed Bath & Beyond Inc.
    BBY,
    +23.66%
    it shot up 22.2% with no discernible catalyst. Shares in the troubled home goods retailer tumbled last week after the company warned it might have to file for bankruptcy. In a business update Thursday, the sometime meme darling said it has “substantial doubts” about its “ability to continue as a going concern.”



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