Stocks Drop After Big Rally on Weak Factory Data: Markets Wrap

Stocks erased gains after data showed US manufacturing contracted in November for the first time since May 2020, tempering optimism with a report that highlighted signs inflation is abating.
The S&P 500 pushed lower after Wednesday’s big rally, while Salesforce Inc. weighed on the Dow Jones Industrial Average as the software company gave an outlook that reflects a weaker economy. The greenback slumped to the lowest level since August, while two-year US yields — which are more sensitive to imminent Fed moves — were flat.
The Institute for Supply Management’s gauge of factory activity slid to 49 from 50.2 in the prior month. The median projection in a Bloomberg survey of economists called for a reading of 49.7. Meantime, a key gauge of US consumer prices posted the second-smallest increase this year while spending accelerated.
“Bottom line, seeing inflation roll over and the soon to be peak in Fed rate hikes was the first mountain to climb for both the economy and markets in 2022,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “The next mountain needing to be conquered, and will be the 2023 focus I believe, is the economic consequences to such a sharp rise in interest rates, the higher cost of capital that both businesses and households have to deal with and the recession it creates.”
Read: Post-Powell Stocks Rally Fueled by Frenzy in Short-Dated Options
Worries about how far central bankers will go to rein in inflation have kept investors on edge, and equities volatile. Markets are still pricing in rate hikes from the Fed until mid-2023, although Jerome Powell’s lack of a sharp-edged message sent Wall Street rallying Wednesday on optimism officials will back off from tightening too aggressively.
JPMorgan Chase & Co.’s Dubravko Lakos-Bujas said sharp declines await US stocks in the first half of 2023 against the backdrop of a mild recession and Fed rate hikes. The prediction adds to calls from strategists at Goldman Sachs Group Inc. and Deutsche Bank AG that American equities are in for a wild ride next year.
“Despite the recent rebound in equities, we do not think the macroeconomic conditions for a sustained market rally are yet in place,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “We maintain our view that the Fed will hike rates by 50bps in December and another 50bps in 1Q23, bringing the hiking cycle to an end, however the cumulative impact of prior ...