Wall Street Stabilizes Following Sharp Drop Due to Fed’s Heightened Inflation Outlook

Wall Street concluded trading on Thursday relatively unchanged, with the Dow Jones Industrial Average slightly rising to break a 10-day downward spiral, its longest in half a century.

The Dow closed up 0.4%, or 15.37 points, at 42,342. The broader S&P 500 and the tech-centric Nasdaq were relatively flat at the end of the day, each down by approximately 0.1%.

The major stock indexes had a strong opening, recouping some of the significant losses from Wednesday after the Federal Reserve revised its outlook for rate decreases next year. However, they failed to maintain their early gains as the yield on 10-year Treasury notes climbed for the second consecutive day to 4.569%, influenced by expectations that interest rates might remain elevated. Higher interest rates increase borrowing costs for businesses, potentially dampening profits and reducing stock values.

On Wednesday evening, the Federal Reserve reduced its benchmark short-term federal funds rate by a quarter of a percentage point as anticipated. However, it scaled back its projections for rate cuts in the following year. It now anticipates only two rate cuts, each by a quarter percentage point, due to predictions of persisting inflation. This adjustment is a decrease from its September projection of four rate cuts of a quarter-point each. This outlook of fewer rate reductions and continued high inflation led to significant drops in all three major U.S. stock indexes, marking their most substantial daily declines since August.

Chris Zaccarelli, the chief investment officer at Northlight Asset Management, humorously remarked, “Santa came early delivering a 25 basis point rate cut to the market’s stocking, but also left a note warning of coal for next year.”

U.S. Economic Resilience

The U.S. economy expanded at a 3.1% annualized rate from July through September, outperforming the Commerce Department’s earlier estimate of 2.8% and surpassing the 2.9% consensus estimate from Dow Jones.

Consumer spending, which makes up roughly two-thirds of the entire U.S. economic activity in the $29.4 trillion economy, increased by 3.7% during the quarter. This rate is faster than the previously estimated 3.5% and marks the quickest pace since early 2023.

The housing market also showed strength, with existing home sales in November climbing 6.1% from the previous year, the largest annual increase observed in over three years.

Eugenio Aleman, chief economist at Raymond James, supported earlier comments this week from the Federal Reserve Chairman, stating, “there are no signs, for now, of economic weakness.”

Market Highlights

In other market developments:

Bitcoin: The cryptocurrency fell below $100,000 following comments from Fed Chairman Jerome Powell on Wednesday that the central bank is not permitted to hold the digital currency.

Natural gas: Prices increased in anticipation of a cold wave expected to hit the East Coast, coupled with a shrinking supply.

Nike: Shares of the sportswear giant climbed post-market following the announcement of earnings that surpassed expectations.

Micron (MU): The semiconductor manufacturer provided forecasts for quarterly revenue and profit that fell short of analysts’ expectations.

Accenture (ACN): The IT services firm exceeded Wall Street’s forecasts for first-quarter revenue.

Lennar (LEN): The homebuilder reported earnings for the final quarter of its fiscal year that did not meet expectations.

Vertex Pharmaceuticals (VRTX): The company’s experimental non-opioid pain relief drug showed little difference from a placebo in a mid-stage trial.

Darden Restaurants (DRI): The restaurant chain posted strong quarterly results and a positive outlook.

(This story was updated to include additional information.)