After a nice rally at mid-week, the stock market headed sharply lower again Thursday, weighed down by negative economic growth and growing pessimism about the long-term outlook. The market is ending September lower than where it began the month.
The main catalyst for the most recent selloff was the final second-quarter reading on Gross Domestic Product (GDP), showing the U.S. economy is technically in a recession. The Bureau of Economic Analysis (BEA) reported that real GDP decreased at an annual rate of 0.6% in the second quarter of 2022, following a decrease of 1.6% in the first quarter.
“Private goods-producing industries decreased 10.4%, private services-producing industries increased 2%, and government decreased 0.2%,” BEA said in a release. “Overall, nine of 22 industry groups contributed to the second-quarter decline in real GDP.”
A recession is defined as two consecutive quarters of negative economic growth and while many believed the economy was already in a recession, the official designation appeared to spook investors, who sent the Dow Jones Industrial Average back into bear market territory.
With Thursday’s selloff, the Dow is back 20% below its January high. Some of the other major averages are already there. The S&P 500 has lost about 24% of its value so far this year.
Stanley Druckenmiller’s warning
Comments from legendary investor Stanley Druckenmiller added to investors’ heartburn. At CNBC’s Delivering Alpha conference Wednesday, Druckenmiller pulled no punches, saying the Federal Reserve’s aggressive increases in interest rates guarantee a “hard landing” for the economy next year.
“I will be stunned if we don’t have a recession in ’23,” Druckenmiller said. “I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so-called average garden variety,” adding that he doesn’t rule out “something really bad.”
Druckenmiller stunned many at the conference and those watching on TV when he said it’s possible the major stock average will show little to no growth over the next decade.
Even some good economic news put a negative spin on stocks. The government reports initial claims for unemployment benefits fell last week.
Ordinarily, that would be seen as a positive but in this case, the Fed wants to see unemployment rise, which it believes will reduce inflation.
The interpretation on Wall Street is a continued strong labor market means the Fed will continue to raise interest rates.
Other factors sending stocks lower
Adding to the pessimism were comments from two top Fed officials, who made clear that policymakers plan to keep raising interest rates.
The final nail in the market's coffin was Bank of America's downgrade of market darling Apple, sending that stock sharply lower.
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